Major adjustments underway in CEE
by Peter Brezinschek, Head of Economics and Financial Research, RZB
The slump in the global economy has now reached the CEE region. Although the domestic economies in the CEE countries are still supported by private consumption and investments, a gloomier mood is becoming more and more prevalent in all of the Eastern European economies.
During the last three months, the cycle of forecasts has reflected an unprecedented turn for the worse. Channels of contagion included the drastic deterioration in export prospects and the sudden drying up of cheap financing via loans as capital flows fade away. Competitiveness and attractiveness for foreign investment has declined as a result of excessively strong wage growth compared to productivity gains.
In order to exploit the long-term growth potential, an adjustment process has started and its effects will be felt well on into 2010.
In order to exploit the long-term growth potential, an adjustment process has started and its effects will be felt well into 2010. Along with curtailing budget spending, a pronounced reduction in lending activity and declines in real wages are fundamental prerequisites for consolidating the mostly unmanageably high current account deficits in the region.
The most severe downturns are expected in Ukraine and Hungary. Russia is also on the verge of a tangible phase of economic weakness, but has the resources to get back on its feet without outside help.
Impact on monetary policy and exchange rates
One positive side-effect of the drop-off in economic activity and commodity prices is the drastic reduction in inflation. This has created leeway to reduce interest rates in almost all of the CEE countries, although attention must be paid to the fragile
development of exchange rates for some of the region’s currencies. Restrictive monetary policy has only been seen temporarily in countries which are suffering from acute depreciation problems (e.g. Ukraine, Russia, Romania). At the same time, rating downgrades and the persistently high levels of risk aversion are keeping yield spreads on CEE bonds high, both for LCY bonds and Eurobonds.
Impact on the equity markets
The GDP forecasts of just 1% growth on average for the CEE region have also impacted the earnings forecasts for 2009. In almost all of the markets, consensus estimates are expecting declines in earnings. Nonetheless, amidst conditions marked by renewed deterioration in leading economic indicators and falling share prices at the global level, the CEE stock exchanges are also being hit. Consequently, we expect to see the cyclical low on the stock markets come sometime during the first quarter. As the mood on the markets slowly brightens, 2009 as a whole should end on a relatively positive note, albeit with a high degree of fluctuation of 30-40 per cent.
Peter Brezinschek is Head of RZB’s Economical and Financial Research, based in Vienna.