OUTLOOK 2013: Central Europe penned in by crisis

By bne IntelliNews December 4, 2012

Tim Gosling in Prague -

The four Visegrad states are following divergent strategies in their bids to defend themselves against the unfolding European debt crisis. It's an illustration of the countries' deep dependence on the EU that none of those tactics can pull them away from the trouble, and ironic that the only member of the Eurozone among them is the one doing best.

At one extreme, the Czech approach has remained steady - too steady, argue many - with Prague maintaining harsh austerity come what may. In November, the government finally admitted it needs to ease off a little on its fiscal deficit targets, but not until 2014. That leaves the Czech National Bank on its own again to try to provide some stimulus in 2013, despite having run out of conventional ammunition.

At the other end of the scale, Hungary has been consistent only in its erratic policymaking. That has helped the economy tumble into recession, with investors and the banks despairing of the government's capricious policies. Spending cuts and reform have been threadbare, while the government dances the hokey cokey with the EU and International Monetary Fund (IMF) over a bailout loan. There's little sign that will change in 2013 - unless it is forced to play ball by the markets, hard currency needs, or both.

To the north, Slovakia will be hoping its car plants can continue to drive the economy at the surprising pace it has managed in 2012. Starting out with a stance that sought to meet ambitious fiscal consolidation targets with a commitment to protect spending, the Smer government, which took office in April, has found itself forming policy on the hoof, as slowing growth saw it admit that on top of revenue-raising measures applied to business and the wealthy it has to look again at where it can save a few pennies. However, there's little fat to trim given the country's horrible unemployment figure, so the 2013 budget continues to hinge on uncertain growth prospects.

Next door, Poland's fall from its "island of prosperity" into the stormy seas in which everyone else has been floundering means Warsaw has had to be the most flexible in its strategy. The government began the year stressing austerity, only to relax as the impact of the crisis became clearer. In the fourth quarter, it was looking to create tools to drive infrastructure investment without worsening state debt levels, and it has promised to continue to push growth as well as austerity, notwithstanding concern at the likes of the European Bank for Reconstruction and Development (EBRD) over "excessive reliance on public investment".

With inflation receding, the National Bank of Poland - the only central bank in Europe to hike rates in 2012 - finally offered a first cut in November, and it's likely to continue to ease monetary policy in 2013 as poor labour market indicators continue to squeeze the domestic demand that has done so much to protect the economy until now. The catastrophic state of the country's construction firms will do little to help in that regard.

Growing pains

Erste Bank calls the European Commission's forecast for the Czech Republic to recover from a likely contraction of 1.3% of GDP in 2012 to 0.8% growth next year "optimistic". It suggests 0.4% looks more realistic, while warning it may well have to lower that outlook before the end of this year.

The Commission sees Polish growth slowing to just 1.8% in 2013 as continued deterioration in domestic demand increases its exposure to shaky export markets. Meanwhile, it clearly expects the Slovak car trick to continue, pitching 2012 growth at a full 2.6% - the fastest in the Eurozone - with a slight deceleration to 2% in 2013 due to continued slowdown in Eurozone demand and ongoing fiscal consolidation. The likes of Komercni banka and Erste are in line on the 2013 prediction.

The Hungarian economy should just scrape back into positive territory with growth of 0.25% in 2013, reckons the Commission, but that presumes the country does not fall victim to the numerous domestic risks it faces on top of the dangers of the Eurozone crisis. The EBRD worries that Hungary's "traditional strength in attracting export-oriented investment appears increasingly in doubt," while continued pressure on the banks means lending will slow even further and deleveraging by parent groups increase.

The banking sectors in the Czech and Slovak republics remain among the most stable - but also most conservative - in CEE. Despite some risks to profitability, Poland's banks also look solid.

Hungary's public debt, meanwhile, remains at around 80%, and having been locked out of international debt markets for the whole of 2012, many analysts suggest it will struggle to keep up with foreign currency debt obligations in the first half of 2013. Most are hoping that will finally push Budapest to rein in its unconventional policy-making in order to seal a bailout.

Across the rest of the region, sovereign debt issues spiked in 2012 as the wave of liquidity sparked by action from the US Federal Reserve and European Central Bank sent investors searching for returns and Visegrad yields to historic lows. With commentators starting to talk of "bubble" in emerging market debt, Poland and Slovakia in particular spent November front-loading 2013 borrowing needs.

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