CEE sovereign issuers paint encouraging picture for post-Covid recovery
In GlobalMarkets’ discussion with DMO heads from Lithuania, Slovenia, Ukraine and Uzbekistan at the end of May, there emerged an optimistic outlook for their countries.
Present at the panel were:
Yuriy Butsa, government commissioner for public debt management, ministry of finance, Ukraine
Marjan Divjak, director general, ministry of finance, Slovenia
Łukasz Januszewski, board member markets and investment banking, Raiffeisen Bank International
Odilbek Isakov, deputy minister of finance, ministry of finance, Republic of Uzbekistan
Audrius Želionis, director, state treasury department, ministry of finance, Lithuania
Christopher Garnett, senior adviser, GlobalCapital Conferences
While Raiffeisen Bank International’s Łukasz Januszewski was mindful of the possible risks of a worldwide second wave of Covid-19, the four countries represented were all confident that their economies will return to strong growth in 2021, with Uzbekistan forecasting small positive growth even in 2020.
Even if there were a second wave of pandemic in autumn 2020, all the panellists agreed that countries would be better prepared in their policy responses and that lockdowns would be unlikely to be as severe. Absent a second wave, Slovenia expects to recover the GDP loss of H1 2020 during the course of 2021, for example, on the back of resilient exports and a well‑overhauled banking sector after the sector’s crisis of a few years ago.
Discussion of earlier crises — going back to and including the global financial crisis that began in 2008 — prompted the panellists to agree that the CEE region’s experience of waves of economic and financial problems made it stronger and more able to recover quickly from the effects of the pandemic. CEE has “more space for volatility” and a “better prepared toolkit”.
Lithuania and Slovenia, in particular, benefit strongly from their small, flexible and open economies. The four countries emphasised their robust growth models — as an example, Ukraine’s Yuriy Butsa talked about two drivers of his country’s economic recovery as agriculture and IT, unaffected by pandemic.
All the countries have individual responses to Covid-19 and have particular differentiating circumstances. In Uzbekistan the government is determined not to waste a crisis and is pushing hard with its privatisation plans to reduce state ownership from 85% to 25% of the economy, with sales of state mining and banking businesses and a restructuring of the energy sector. Ukraine is focused on the successful deal reached with the IMF — and on help from other IFIs — and the implementation of its new bank ownership law, which after long negotiation should now bring stability to the sector.
On the question of Uzbekistan’s reforms, Odilbek Isakov pointed out that the country had only recently started to emerge from what essentially had continued as Soviet-era economic structures: but that gives policymakers the benefit of being able to review all the options used — and mistakes made — by other countries that had exited those models earlier. He stressed too that privatisation is not only to do with the financial benefit of asset sales, but also with the deeper economic benefit of submitting industries and businesses to international norms of governance, accounting and ownership.
The panel reviewed their funding strategies, with Lithuania, Slovenia and Ukraine all having notable success in the international bond markets already this year, just before and (for Slovenia and Lithuania) also at the peaks of Covid-19. Uzbekistan had done its inaugural bond issue late last year. With a mixture of international issuance, domestic bonds and IFI financing, all were confident of their funding for 2020: Lithuania has done its biggest ever borrowings and Slovenia was confident it was already pre‑funded for obligations falling due in 2021.
The panel also discussed the ways in which the region had been affected from public health, infection and mortality points of view. It was notable that — in these four countries — infection rates were greater the further west one went: although in no case did the pandemic’s medical impact come even close to the levels seen in most western European countries. Indeed, Slovenia had been the worst affected of the countries on the panel, yet its government also had been the first in the world to declare the pandemic formally over — on May 14.
Panellists offered a number of explanations for this, with Raiffeisen Bank International’s Januszewski pointing out the demographic and social differences in CEE, with even the larger cities a lot smaller than those in the west, less public transport or commuting. Above all, the timing had been different — CEE governments had more time to prepare and to learn from experiences of countries outside the region that were hit first. Isakov commented that within four days of Uzbekistan’s first case, a $1bn economic package was in place to mitigate Covid-19’s impact. Ukraine and Uzbekistan, as much larger countries with lower population densities, are structurally more resistant to widespread disease transmission, and Uzbekistan has a rolling programme of opening different cities and regions post-lockdown.
Butsa commented that release from lockdown would be a behavioural experiment and the signs were that Kyiv’s metro network would take a long time to revert to normal usage levels: the possible effects on consumption of people staying at home even when they were allowed not to are an economic risk.
Optimism — and caution
Despite the optimistic economic outlook the panellists shared, all had similarly cautious warnings. The possible effects on tax-takes of economic fallout from the virus were clear: in Ukraine’s case, for example, Butsa expressed relief that banking reform was done, inflation low, and that the government had fiscal space for more stimulus.
Two potentially profound geopolitical results of the pandemic were discussed: one was the apparent low degree of political unity among big EU states, where particularly in the early stages of the crisis there seemed not much appetite for co-ordinated action — and the ‘coronabonds’ initiative was dead on arrival; the second was the potential for global supply chains to diversify away from China — or at least for companies to want to establish alternative, duplicate supply chains.
Lithuania and Slovenia both welcomed the late May announcement of the EU’s funding package, and panellists who expressed a view were in agreement that any EU wobbles were temporary, although acknowledging the opening stages of Franco-German response had lacked accord.
As for the potential for a move away from manufacturing in China, all panellists thought this was a reasonable expectation — although Isakov emphasised the importance to Uzbekistan of Chinese partnership — and equally that CEE countries might benefit. Butsa said there were already important elements of the auto sector supply chain moving to Ukraine for labour-intensive processes and that countries such as his had the great benefit of being closer to western European markets — and production centres in Hungary and Slovakia, for example — so simplifying logistics.
Panellists agreed that there are possible long-lasting effects on China’s role in global manufacturing, although Slovenia’s Marjan Divjak thought they were likely to be short-lived. The possibility that globalisation was going into reverse was discussed. Although that was discounted, some panellists did think it might splinter into large regionalisms — the ‘multi-polar world’ argument. Raiffeisen Bank International’s Januszewski concluded that although globalisation would continue, it was entering a “new chapter”, driven by digitalisation. Other panellists agreed — Lithuania for example has a burgeoning fintech industry.