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Emerging Europe


Hungary tightening, ruble strength, Bulgaria support

Officials in Hungary sought this week to reassure investors that they will tackle inflation and mounting macro imbalances. Tighter policy is needed, which underpins our below-consensus growth forecasts. Elsewhere, the Russian ruble strengthened beyond 60/$ this week – its strongest level since 2018 – which, combined with the stabilising inflationary backdrop, will give the CBR the confidence to ease capital controls and cut interest rates further. Finally, Bulgaria announced measures to shield the economy from high inflation this week, but we doubt that it will be enough to prevent a recession.

20 May 2022

War in Ukraine to exacerbate macro imbalances in CEE

The war in Ukraine will exacerbate two key macro risks in Central and Eastern Europe this year: wage-price spirals (particularly in Poland) and widening current account deficits (particularly in Hungary and Romania). Monetary policy will do most of the heavy lifting to cool demand and we think that interest rates will stay higher for longer than most expect. This is one factor behind our below-consensus GDP growth forecasts for the region. In the meantime, currencies will weaken further against the euro.

19 May 2022

Hungary’s growing imbalances, Russian gas flows

Comments from Hungary's central bank this week suggest that policymakers are moving closer towards a joint tightening of monetary and fiscal policy to cool demand and narrow the twin deficits. Elsewhere, Russian industrial production and retail sales figures showed much smaller falls in March than had been expected, but we think large declines are likely in April and May. Finally, the risk of energy rationing surged this week after Gazprom halted gas supplies to Poland and Bulgaria. Poland looks in a relatively good position to deal with this but other countries, such as Bulgaria and Czechia, are not and any disruptions would cause deep(er) recessions this year.

29 April 2022
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Inflation risks mount as commodity prices surge

Surging commodity prices have pushed up inflation across the region and we expect inflation to hit fresh multi-year highs in the coming months. A loss of Russian gas supplies should not lead to rationing in Poland, but it will have a big impact in Bulgaria and energy bills are likely to be higher across the region this year. With activity holding up well for now, central banks continue to focus on inflation risks and we expect large interest rate hikes next week in Poland (100bp) and Czechia (50bp). In contrast, Russia’s central bank looks set to lower interest rates further now that inflation pressures have eased sharply. It may be shifting to a dovish stance too quickly, but looser monetary conditions will only go so far to supporting activity.

Completion delays prolong Budapest office market dip

Past delays in development projects mean that office completions will exceed demand in Budapest this year and next. As such, having held broadly steady in 2021, office vacancy is set to rise again and put downward pressure on rents over the next couple of years.

Recession risks take centre stage

The Russian economy will collapse this year and we expect spillovers from the war in Ukraine to cause a recession in many of the smaller countries in the region, particularly Bulgaria and the Baltic States. Loose fiscal policy and strong labour market dynamics should help Poland and Hungary outperform but, even so, we’re more downbeat on GDP growth in all major economies than the consensus. We think inflation will end the year stronger and interest rates higher than most expect. The economic backdrop of widening macro imbalances, the euro-zone recession risk and aggressive global monetary tightening will cause the region’s currencies to depreciate.

New policy support, CA deficits, Turkey FX conversion

Governments in Central and Eastern Europe stepped up support this week for firms and households against surging inflation, but we don't think they will prevent some economies from contracting in Q2. Meanwhile, current account deficits have blown out this year and will only deteriorate further due to high commodity prices and supply-chain disruptions. One country where the current account is looking concerning is Turkey and the central bank took steps this week to shore up its FX reserves. At the same time, policymakers are pushing their lira-isation strategy but this is likely to raise risks in the banking sector further down the line. We are sending this Weekly one day earlier than usual because our offices are closed for Good Friday on Friday, 15th April

Energy sanctions ratchet up, Russia close to default?

This week’s announcement that the EU will ban the import of Russian coal from mid-August will not have a major impact on Russian export revenues, but it marks a clear shift in the EU’s aim to target Russia’s energy sector ahead of talks on a possible embargo on Russian oil imports next week. Meanwhile, the possibility of a Russian government default is now looking increasing likely following the US Treasury’s decision to restrict Russia’s central bank from using reserves held at US financial institutions. Some Russian corporates have also reported problems with payment so if the government does default, corporates may be next.

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