beyondbrics

Panic over for CEE? Not quite. Equities in central and eastern Europe are down again on Monday, after a recovery last week, and the main central European currencies are again softening against the euro and Swiss Franc.

In part the market weakness reflects the breakdown of the US debt talks, and Moody’s downgrade of Greek debt by three notches. But it also results from worries that Thursday night’s eurozone deal on a new Greek bail-out may not be enough to prevent the debt crisis flaring up again. Even if it does, a weakening global growth outlook is still expected to hit central and eastern Europe harder than other emerging market regions.

The European Bank for Reconstruction and Development and Capital Economics both put out reports highlighting the dangers when the eurozone summit was barely finished. The EBRD warned of “serious risks” to CEE from any escalation of the eurozone crisis, even as it raised its growth forecast for its 29 countries of operation based on a core scenario that those risks would not come to fruition. Capital Economics suggested to think that emerging Europe could avoid contagion could “prove to be dangerously complacent”.

The danger of potentially the most serious form of contagion to CEE, from a west European banking crisis, seems to have receded somewhat since the summit, says Neil Shearing, senior emerging markets economist at Capital Economics.

But he warns that the region will continue to get hit by periodic shocks and attacks of risk aversion among investors, as the eurozone problems flare up. These are likely to hit assets such as the Hungarian forint, Romanian lei, and – despite its relatively robust economy – Poland’s zloty, because of the comparative depth of its market.

The most direct impact is likely to come through the trade channel, because of the region’s strong reliance on western European demand, particularly from Germany’s export machine.

The consultancy forecasts central and east European growth will slow by a full percentage point from 4.5 per cent to 3.5 per cent – though it admits this is below consensus. It contrasts with the EBRD’s base scenario for a broadly comparable area of growth slowing only from 4.8 per cent this year to 4.4 per cent in 2012.

Capital’s more bearish stance is based on its forecast that German growth will slow abruptly, from 3.5 per cent this year to 1.5 next – with the eurozone as a whole slowing from 2 per cent to a meagre 0.5 per cent.

If the reality turns out anything like that, then CEE will inevitably suffer. “These economies are the most open of any emerging market, more open than China,” says Shearing. “So in a global economy that struggles, Emerging Europe will continue to struggle, [since] it is very open to trade flows, and has very high external funding requirements. It doesn’t really have the same capacity to generate self-sustaining growth, in the way that perhaps Asia does.”

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