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External vulnerabilities firmly in the spotlight

Current account deficits have widened to alarming levels in Poland, Hungary, Turkey and, most of all, Romania, in recent months which has contributed to the downward pressure on currencies this year – the Turkish lira, Hungarian forint and Polish zloty have been among the worst performers against the dollar. It is encouraging that natural gas prices have fallen over the past month (which should reduce energy import bills), but we think current account deficits will remain uncomfortably high well into 2023. This will leave these economies heavily dependent on foreign capital inflows and vulnerable to a further tightening of external financing conditions. This will make it harder to finance these deficits and keep currencies firmly under pressure until risk appetite recovers, which we don’t expect until mid-2023.

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