CEE-7 countries' fiscal balaces will improve in 2012; Hungary still in a fragile position

1 March 2012 — Daniela GHETU
The central governments of the larger Central and Eastern European (CEE) countries will need to borrow EUR 94 billion in 2012 to finance deficits and roll over existing debt, equivalent to an estimated 10% of their combined GDP, forecasts FITCH in a recent report published by the agency. This puts CEE-7 countries (Croatia, Czech Republic, Hungary, Poland, Romania, Slovakia, Slovenia) on a par with their peers in the eurozone's healthy core.

In comparison, Greece, Portugal, Ireland (whose requirements are covered by bailout programmes), Italy and Spain face GPBRs of between 15%-35% of GDP in 2012. Fitch considers the GPBRs of CEE-7 countries to be manageable, and that, barring severe turbulence on financial markets or policy mistakes, market access will be retained.

Fiscal balances are expected to improve across the region in line with commitments to the EU. Fitch forecasts that the (GDP-weighted) average general government (GG) deficit in the CEE-7 will fall to 3.5% of GDP in 2012 from an estimated 4.1% in 2011. The agency forecasts that fiscal consolidation in Poland, Romania and Slovakia will lead to improvements in their headline fiscal balances of between 1.7 and 2 pp of GDP. Hungary‟s balance will swing back into deficit, but the 2011 figure was distorted by the reversal of previous pension reforms, which brought hitherto privately-run pension assets back under state control. Among CEE-7 countries, only Slovenia is projected to run a broadly unchanged GG deficit in 2012, as uncertainties remain about the recently-installed government's deficit reduction plans.

Five of the seven countries in our sample recently had parliamentary elections (Poland, Slovenia and Croatia), or are scheduled to hold them in 2012 (Slovakia and Romania), the Report shows. These cloud the outlook for fiscal policy, notwithstanding fiscal targets agreed with the EU, and the harder constraints and surveillance imposed by the EU. A new government is in place in Romania ("BBB−"/Stable), and has undertaken to meet policy targets agreed with the EU and the IMF.

Hungary, on the other hand, is downgraded already to speculative grade ("BB+‟), and both it and Croatia ("BBB−") are on Negative Outlook. Their capacity to obtain market financing on sustainable terms depends to a great degree on the implementation of fiscal consolidation programmes, and in Hungary's case on the restoration of policy credibility. Hungary is in a particularly fragile position, as formal negotiations on a new precautionary IMF-EU deal (which markets appear to have discounted already) have yet to begin. Obtaining the deal, and avoiding further instances of policy unpredictability will be key to securing smooth market refinancing in 2012 and beyond.

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