It’s still not looking good for Emerging Europe according to the latest report on the region from Fitch:
Growth in EE is expected to drop more than in other regions as the characteristics of many countries — such as trade openness, prior macroeconomic imbalances and commodity dependence — leaves them relatively exposed to the major shocks that have rocked the global economy: the sharpest and most synchronised recession in the world’s “advanced” economies since World War II; a reversal of international capital and financial flows; and a dramatic decline in commodity prices.
The central Europeans economies (less so Poland) will be badly affected through the trade channel as they are relatively open and their exports weighted towards cyclical industries such as cars. Commodity producers, mainly in the CIS, will see a sharp drop in income from the fall in their terms of trade. Some poorer countries in the CIS and Balkans are likely to see a drop in workers’ remittances.
The countries likely to fare the worst, according to the rating agency, are Hungary and Kazakhstan. These two economies are most exposed to the dramatic decline in global trade and financial flows and the deleveraging process. Poland and Turkey, meanwhile, are the least exposed to these shocks in Fitch’s view – although they are far from immune.
This is because the lead contributor to the EE downturn will be the abrupt fall global in trade. As Fitch explains (our emphasis):
The volume of world trade plummeted by 11.9% in Q408, while the volume of imports by the EU15 fell by 9.3% 3 . Moreover, this is making it harder for countries to correct macroeconomic imbalances through shifting resources to the export sector rather than shrinking domestic demand and is dampening the benefits on competitiveness from currency depreciations. Competitiveness effects may come through more strongly in the second half of the year, but countries with currency pegs will find it more difficult to rebalance their economies following depreciations by other countries in the region.
Many countries in EE are relatively open, so the global recession has been rapidly transmitted to exports. The Czech Republic, Hungary, Slovakia and Slovenia are particularly open economies and closely integrated within the EU economy (particularly Germany): exports of goods are equivalent to 79% of GDP in Slovakia, 70% in the Czech Republic and 68% in Hungary (2007 data). That said, exports typically have a high import content, so the effect on value?added is much lower.
So you can forget about foreign exchange-denominated loan exposure at this point in the likes of Hungary, Czech Republic and Poland. While this is still obviously a concern (and regional currency euro cross-rates are creeping back to the lows of February which previously set off the EE panic) the escalation of the crisis into the real economy and trade decline is now the key vulnerability.
Devaluations are actually greatly needed to help competitiveness, and it is countries with pegged currencies that may suffer most. Accordingly, it is each country’s respective trade openness that should also be noted, say Fitch.
This is highlighted in the below chart:
Related links:
CEE’s stand against SPECTRE-lators – FT Alphaville
Another Eastern European meltdown? - FT Alphaville