by Gunter Deuber, RBI |
So far, 2018 has been a year of challenges for some (major) Emerging Markets. Particularly vulnerable countries with regard to their debt situation in the private and/or public sector came under pressure due to a mix of interest rate hike concerns in the US, capital outflow concerns associated with higher US yields, US (trade) sanctions escalations, increasing concerns about the health of the global economy and associated debt sustainability and/or country-specific weaknesses or populistic misjudgements. Turkey, which has been hit very hard, has explicitly resisted the rules of the global financial markets for increasing interest rates or a potential cooperation with the International Monetary Fund (IMF). Moreover, in recent years Turkey in particular has very strongly built its economic growth or inflated economy on rising debt on the international financial market, especially in the private sector.
CEE vs. global Emerging Markets: indebtedness of 138 % vs. 189 %
For the time being, there is no sign of easing on any of the emerging market fronts outlined above. The US Federal Reserve should maintain its steady rate hike well into 2019, the US-China trade dispute will probably keep the markets occupied for even longer, populism seems to be still on the rise and interest rates in the euro area will definitely normalise in 2019 as well. In this respect, it is interesting and justified to question how the Emerging Markets of Central and Eastern Europe (CEE) are positioned in view of the trends outlined above. To begin with, it seems that CEE is in good shape. Some countries in Central and Southeastern Europe (above all the Czech Republic and Romania) are already well ahead of the ECB in their interest rate cycle and should therefore be less exposed to pressure from the international markets, even during a period of weakness in the international financial market and with rising concerns about interest rate hikes. The same applies to countries that did not cut interest rates too excessively in the last cycle (Poland, Serbia). In addition, the Hungarian central bank, which is still very expansively oriented, has indicated that it does not want to overly oppose the markets. Furthermore, in recent years, most CEE countries have not built their growth on further debt in the public and/or private sector. While debt in the private sector in the CEE countries and global Emerging Markets was still roughly equal in 2010 (at around 100 % of GDP), the difference now amounts to almost 40 percentage points (89 % in CEE, 130 % global Emerging Markets). In terms of public debt in relation to GDP, the CEE countries and global Emerging Markets were still roughly on a par in 2013 and 2014, respectively. The public debt-to-GDP ratio in the CEE countries is now also below the levels in global Emerging Markets (49 % in CEE vs. 56 % global Emerging Markets). It should also be noted that most CEE countries (above all the countries of Central Europe and Russia) should have a higher debt sustainability capacity than most global Emerging Markets peers, as they are either characterised by a significantly higher income level or have extraordinarily stable external positions. In this context, the most recent consolidation of public finances in some other CE/SEE countries is particularly noteworthy, following a sharp increase in public sector debt in the wake of the global financial crisis (e.g. Croatia, Serbia, Slovenia). And in the few CE/SEE countries with sectorally high credit growth rates in the private sector (e.g. the Czech Republic, Slovakia, Romania), the relevant regulators have taken precautionary measures to limit private sector credit expansion. As a result, the banking sectors in the region are not characterised by any discernible imbalances. In this respect an “old logic” seems to apply: An (Emerging Markets) region that was once in crisis should not fall back into a deep regional crisis some ten years later.
CEE: Stability orientation and compliance with accepted market rules
In Romania, the only country in the region that is currently experiencing a discernible deterioration in its fiscal and current account position, at least the independent central bank remains a very credible player. The latter remains a key anchor for market confidence as the Turkish Lira crisis as of 2018 has shown. Otherwise, most of the CE/SEE countries are currently shaped by a stability-oriented economic policy orientation. Even governments in countries such as Hungary, Poland and the Czech Republic that are somewhat inclined towards populism have not shown any irresponsible economic policy orientation in recent years. And a little further east, Russia has been pursuing a stability-oriented economic policy for years anyways, and has been reducing its external debt in recent years. Moreover, as a precautionary measure, the Russian central bank has recently even raised its key interest rate, thus consolidating its position as an economically independent player. Interestingly, Belarus has learned from its “big brother” and has itself pursued a stability-oriented economic policy in recent years – which is why an IMF agreement is currently neither in sight nor needed. In Ukraine, efforts are actively being made to ensure that IMF cooperation continues, and the politically independent central bank is also pursuing a very restrictive monetary policy here. So here, too, the difficult election year of 2019 is not being entered with a naive eye and at least certain market rules are being adhered to. One might almost think that the CEE region can sit back in view of the remaining market concerns about (some) Emerging Markets – at least from a fundamental perspective. However, past crisis experience shows that it is often liquid markets that suffer in sales phases – regardless of their fundamental condition. In this sense, Poland and the Czech Republic seem to be particularly exposed. Poland remains one of the largest Emerging financial markets and in the Czech Republic there has been a disproportionately high inflow into the bond market in recent years. But both countries are certainly not being thrown off track by any conceivable temporary setbacks on their local financial markets. Above all, in both countries the debt situation in the private and public sectors offers no cause for concern.
Gunter Deuber is Head of Economics, Fixed Income and FX Research at Raiffeisen Bank International in Vienna.