CEE - What's happening in Central & Eastern Europe?

CEE RECOVERY TO BE PATCHY

The eventual economic recovery for Central & Eastern Europe is to be brighter than that in store for its Western neighbours, according to Gabor Hunya, senior research economist at the Vienna Institute for International Economic Studies (WIIW). Hunya, speaking at the Hungarian Venture Capital Association's annual conference in Budapest on 15 April, added that a reversion to the heady days of 2006 and 2007, with cheap debt and FDI pouring in from the west, was not likely.

"Smaller, more open countries will be more deeply affected than others," he pointed out, stressing the heterogeneity of the region and citing the Baltics as unlikely candidates to emerge any time soon. He pointed out that even if demand were to increase in small economies, it was likely to be demand for imports, thereby not positively impacting domestic goods. Countries with large deficits and depreciating currencies would also be worst hit.

As such, short-term prospects are best for Poland and Slovakia: the WIIW forecasts 2009 GDP growth to be positive for those two countries (albeit slight), with all other EU economies set to record shrinking GDPs. The eurozone 16 forecast for 2009 is a dire -2%. Medium-term prospects are best for the Balkans, Poland, Czech and Slovakia, with all expected to record GDP growth for 2010, even as the Baltics continue to struggle. Romania, with its relative under-exposure to the export market, was only economy to have showed positive growth in 2008 according to the WIIW.

"The driver of economic growth will be internal generation of cash and savings," Hunya said. This is down to falling external demand for products, which means industrial output and exports will shrink. Floating exchange rate countries will fare better than those with rates fixed to eurozone countries - for example the 20% devaluation of the Hungarian forint since the beginning of the year, which Hunya deems likely to be prolonged, could actually give it an export boost. "Cost-based competitive ratios will be redefined," he said, indicating that a shift in production could be likely.

This could be a sad irony for Slovakia, which in the early noughties overcame its bad rap and attracted manufacturers owing to its low cost base as well as attention from Brussels for its fast-paced reforms. The late-start to the nascent country's transition proved unharmful, as it was the first accession country to join the euro this year. This may now prove a double-edged sword as the country is tied to an exchange rate fixed in June 2008, and also subject to EU-wide interest rates.

Hunya went on to suggest all countries consider taking out all loans available to them, including IMF credit and EU funds. "Using these effectively could help mitigate the crisis, he said, since there is limited scope for fiscal stimulus as well as monetary policy. This is particularly the case in Hungary, which he feels needs simultaneous stability and crisis management. At the time of going to press, Poland became the second country to take up the IMF on its newly created Flexible Credit Line, asking for $20bn.

He concluded with a comparison to the South East Asia crisis ten years ago: "Countries that base growth on foreign debt will take longer to recover. The growth has to be underpinned by future savings. Otherwise the recovery's development will be similar to that seen after the Thai baht crisis, which was a regional, not a global, crisis."

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