Internationally cloudy, but CEE countries are resilient
- CEE is still able to live up to the challenge of the financial markets
- International investors closely examine the different countries
The turbulence on the financial markets is showing only mild signs of abating, but the Central and Eastern European region (CEE) is still able to live up to the challenge of the financial markets. "We continue to recognise two main contagion channels for CEE – namely a tightening of credit conditions, associated with a tightening of capital inflows and the expected lower Eurozone growth", so Debora Revoltella, CEE Chief Economist of the UniCredit Group.
"We also believe that international investors´ risk aversion may strongly enhance domestic weaknesses in some countries. International investors are quite nervous and increasingly selective. They seem to differentiate more than before among the countries and be particularly sensitive to any bad news originating from the domestic level. In such a context large current account deficits, poor economic data or political tensions can be even more dangerous", so the estimation of the economists.
According to UniCredit experts, the region remains in a position to face up to the challenges. They continue to forecast relatively strong economic performance, with growth at 5.6 % in 2008, versus 6.7 % in 2007.
"Especially countries in Central Europe – benefiting from sounder economic fundamentals - are in a good shape", explains Debora Revoltella. But the repricing of risk at the international level triggers a correction of existing unbalances in South Eastern Europe (SEE) and the Baltic countries. The experts forecast some deceleration in growth rates in the SEE countries and the Baltics, from 6.8 % in 2007 to 5.3% in 2008. These are all small, open economies, which have been financing their growth in recent years from external funding, resulting in large current account deficits and widening external debt. Global repricing of risk has hit the region particularly hard, leading to substantial increases in the cost of external funding. "We expect the new global environment to bring some cooling, through lower capital inflows or higher cost of external funding, which will also translate into tighter domestic credit conditions, given the local banking system dependency on foreign funding. A smooth correction of existing unbalances in some SEE countries and in the Baltics should be taken as a positive signal," explains Revoltella.