Local banking strength in CEE to offset growth slowdown

The success of the commercial banking system in central and eastern Europe in taking over from development banks in providing finance will support the region ahead of a forecast slowdown in economic growth

  • By GlobalMarkets
  • 07 May 2019
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Growth levels across central and eastern Europe (CEE) are expected to decline this year, but the region has a trick up its sleeve: a well-developed local banking system that in the 30 years since the fall of the Iron Curtain has evolved into a self-sufficient source of financing for the region.

The IMF’s World Economic Outlook, released in April, projects GDP growth across emerging Europe at 0.8%, a stark decline from recent years of prosperity such as 2018 when GDP grow by 3.6%. The EBRD is set to unveil a similar decline in growth later today (Wednesday).

Weakness in the eurozone and declining external demand for imports are set to weigh heavily on the local export-heavy economies. The Czech Republic and Slovakia are likely to be hit particularly hard by the weakening eurozone, given their open economies and their manufacturing systems that are connected to Germany. 

EBRDBut a well-capitalised lending system and tightening monetary policy in some of the region’s countries are set to pull CEE through what is predicted to be one of the most challenging years for growth since 2015. Poland, Czech Republic and Hungary are some of the countries expected to increase interest rates over the next year.

The evolution of fully functioning local loan and bond markets across CEE will ensure that banks are able to manage domestic demand, which is expected to help offset the worst effects of the predicted slowdown.

Competitive

William Jackson, chief emerging markets economist at Capital Economics, said: “Domestic demand is set to remain strong among these economies, which combined with the development of local markets will help to make this a relatively modest economic slowdown.”

Poland and the Czech Republic, in particular, are two names receiving high praise for their transformations into largely self-sufficient economies, equipped with banking systems that can offer an abundance of liquidity to local borrowers at competitive margins. 

“Central European economies have become less dependent on external financing,” said Capital Economics’ Jackson. “If you compare today to the crises in 2008 or 2011, banks in the region are less dependent on international lenders and their parent banks in western Europe and are now funded to a much greater degree by domestic deposits.”

Charlotte Ruhe, managing director for central and south eastern Europe at the EBRD says: “We have to be cognisant that commercial banks are more present and stronger than ever in CEE — they are solid, liquid and competitive. We don’t want to take business from them.”

Even the development finance institutions that were once an integral part of the post-Soviet reconstruction of banking systems have diminished in influence, as local lenders have grown in independence.

Although the evolution of local markets has boosted the region, continued economic decline past 2020 could weigh heavily on banking systems across CEE, forcing banks to look outwards for help once again.

  • By GlobalMarkets
  • 07 May 2019

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