The region’s economic signs are generally good but political risk has emerged as a cause for concern
Marian Berden, Equinox Global
What will 2016 bring to the world economy? This year it seems more challenging than ever to make economic predictions. Growth in China is slowing, we have entered an era of low commodity prices after more than a decade of booming prices and rising interest rates in the US are having spillover effects in emerging markets. Different economies are at different stages in the cycle, but with East and West, and North and South ever more integrated, no country is isolated from these trends.
Central and eastern European (CEE) countries have not been the main headline-grabbing countries in the news in recent months. Economic data has been relatively supportive. Except for Russia, not many European countries are overly dependent on commodities. Lower oil prices have generally benefited the region.
The CEE region’s main export destination is the rest of Europe, where we are seeing a recovery from a long overhang of the credit crunch. On top of this, a weak euro has made imports from outside the eurozone more expensive and products from the region more attractive. Improved current account balances have reduced most countries’ exposure to global financial vulnerability, though Turkey remains very exposed here. Exposure is primarily to the euro and European Central Bank policies and less so the US dollar and the Federal Reserve.
So far so good. With the region outperforming western Europe most years since the credit crunch, it has been an attractive proposition for credit insurance markets with plenty of cover available.
But downside risks remain. Risk appetite for emerging markets is reducing and with western European economies strengthening and becoming more interesting again for risk-averse investors, CEE countries will have to work harder to keep their growth figures, business environments and investment opportunities in good shape.
One key risk, which has the potential to cast a shadow over the outlook for the region, is political risk. One of the largest economies in the region, Poland, is a key example here. Poland is Europe’s sixth-largest economy and has been one of the most successful and stable post-communist states. After elections in October an ultra-conservative right wing government swept to power, though, which has shaken up the country at various levels.
The new ruling Prawo i Sprawiedliwość party is eurosceptic, firm on traditional religious values and committed to increasing social welfare spending. It also seeks to increase levies on some key sectors, which are owned by foreign investors such as banks, supermarkets and telecoms companies.
New measures proposing more control on the media have led to a clash with the EU amid concerns about freedom of speech and the rule of law. Other institutions also have seen swift changes of power, with the new government forcing changes of control at the Warsaw Stock Exchange, intelligence services and large state-owned companies, among others.
All this has also caused society to be more polarised; tens of thousands have taken to the streets to protest in support of and opposition to the government. Poland appears to be at a crossroad; despite strong growth its wages lag behind those of other European countries. Young people look west. Yet the desire to be more integrated with Europe has also been hampered by the eurozone crisis, followed by the migrant crisis and questions over open borders and the Schengen Agreement. Poles seem for now to have chosen to not look west but to focus internally.
International investors have responded negatively to this trend and the turmoil it has caused in Poland. The złoty, stocks and bonds have all taken a hit. It is yet to be seen if this response is temporary and if the government can restore confidence in its policies and plans.
Euroscepticism and the increased polarisation about political trends is not just an issue in Poland, though, but plays throughout the region.
Hungary’s politics and economy have been on a comparable path for many years and Hungary’s Fidesz party remains firmly in charge, with its support much less divided than for Poland’s ruling party. The most recent electoral win for the party and its leader, Viktor Oban, was pretty much uncontested. Fidesz also looks east and harbours close relations with Russia and Vladimir Putin.
Turkey has similarities as well. Socially conservative policies have been successful for its president, Recep Tayyip Erdoğan. Opposition parties with a more secular background remain popular with the large young population. Turkey is a large and increasingly influential economy, but investors have been spooked by its economic policies. Despite headwinds and external vulnerabilities, Turkey’s ruling party has, for example, promised substantial minimum wage increases. This will not help put international investors at ease, who have been concerned about trends in Turkey for longer and are more important to Turkey, which runs large deficits and is dependent on international financing.
The difference between east and west in Europe is not as big as it once was. The east has strengthened economically and it should be one of the key beneficiaries of western Europe strengthening this year. Political themes are similar across the continent. However, as the example of Poland shows us, countries in the east are likely to be under more scrutiny from investors, whose confidence has been shaken by global trends. This is already having negative consequences for more vulnerable countries like Turkey. Credit insurance markets are less fickle, but will be monitoring the developments in politics and economics and will take action if fortunes change.
Marian Berden is senior credit and macro analyst at Equinox Global
This article was first published in Insurance Day on 11th January