“Central and Eastern Europe is the emerging region most exposed to the crisisin the euro zone,” Capital Economics analysts wrote.
This, and some domestic problems of their own – such as the recent political crisis in Romania, where centre-right President Traian Basescu was suspended by the centre-left coalition in parliament and a referendum for his ousting will be held on July 29 – have made investors very cautious when it comes to the region which, before the crisis struck in 2008, was thriving on all fronts.
“It’s tough to get excited about CEE growth when Western European growth is terrible,” Renaissance Capital’s global chief economist Charles Robertson said.
But he gave the example of Poland, which in 2009 was the only significant economy in Europe to actually grow, and said the country of 38 million people still offered good prospects.
“Poland shows that even without Europe you can get growth,” he said.
“We know the zloty is cheap and very competitive. In fact since the ECB cut rates a few weeks ago the zloty has been appreciating,” Robertson added. “If the dollar weakens... the zloty could be one of the outperformers.”
Economists at Capital Economics think Poland will outperform its neighbors thanks to its large domestic market but “it will not escape unscathed” as exports to the euro zone equal 20 percent of its gross domestic product.
Hungaryand the Balkans are most at risk from sudden withdrawal of funds by banks in Western Europe, especially Austrian and Greek banks, according to Capital Economics, who estimates that in the worst case this could knock 3 percent off the countries’ GDP. “Even gradual bank deleveraging could trim GDP by around 1 percent,” they wrote.
Turkey, with its gaping trade deficit of around 9 percent of GDP, may be at risk of slowing growth as the central bank will be forced to keep monetary policy tight, according to analysts at Capital Economics.
But Turkey has a “very good fiscal picture. Most Europeans would love to have Turkey’s budget finances and Turkey’s debt,” Robertson pointed out.
ING’s Simon Quijano-Evans told Emerging Markets that the Turkish government can take measures to improve the situation of the current account deficit and that the country’s fiscal fundamentals were among the best in Europe and the country was able to diversify its exports away from Europe into Latin America and Asia.
“We’re actually looking for a slight pick-up in Turkey [growth] in the next six to 10 months,” he said. “It is a relatively cautious backdrop. This is highly dependent on oil prices not going higher.”