The normally predictable financial markets in Central and Eastern Europe (EEC) are suddenly dynamic, with the region facing the most diverse economic and geopolitical risks in recent decades, and international investors are beginning to watch them closely, an analysis shows. made by Reuters and quoted by Agerpres.
The EU is facing a migrant crisis at the eastern borders, and the EU bloc claims to be fueled by Belarus, tensions between Ukraine and Russia erupt again, Brussels is stuck in a dispute with the governments of Poland and Hungary over the rule of law and democracy , and Romania has no government.
Investors have long viewed the region as a kind of hybrid, where they could benefit from low EU interest rates, but the area was not completely out of Russia’s orbit, especially on the periphery.
The latest series of events is impossible to compartmentalize, although significant increases in inflation and an increase in the number of Covid-19 cases are important for those following market developments.
The Hungarian forint, the Polish zloty, the Romanian leu, the Russian ruble and the Belarusian ruble are five of the eight worst-performing currencies globally this month, and Eastern European stock markets are the weakest in more than a year.
“Welcome back to emerging markets,” is the title of a JPMorgan report on increasing pressure in the region after years of relative calm.
Thousands of migrants have been trying to reach the European Union from Belarus for months. The situation has degenerated in recent weeks, and thousands of people have been stranded on the Polish-Belarusian border, causing significant tensions between Moscow-backed Minsk and Brussels.
Europeans accuse Belarusian President Alexander Lukashenko’s regime of orchestrating this influx of migrants – mostly from the Middle East – by issuing visas to avenge Western sanctions.
NATO Secretary-General Jens Stoltenberg warned Russia on Monday of any new “aggressive action” on the border with Ukraine, where “significant and unusual” movements of Russian troops have been observed in recent days.
Romania is still trying to form a government, while calls for separatism in Bosnia are a warning of the return of ethnic conflicts in the Balkans.
“We are seeing effects on most assets,” said Viktor Szabo of the investment firm Abrdn, referring to the depreciation of Ukrainian and Russian currencies and government bonds in the region.
Although geopolitical tensions have dominated the news, UBS analyst Manik Narain warns of significant deterioration in economic fundamentals in Central and Eastern Europe.
Rising imports and supply chain problems in key export sectors, such as car production, are likely to lead to the first trade deficit in Poland in 2012. The protracted dispute with Brussels could be costly, if not resolved. declared Narain.
JPMorgan estimates that a deterioration in current account positions will lead to a widening of deficits in Poland, the Czech Republic and Hungary, leading to further currency depreciation and, along with a 300% rise in gas prices this year, fueling inflation and forcing central banks to rise. further interest.
“If the deterioration in the balance of payments proves to be long-lasting, we expect higher currency volatility in the region,” the JPMorgan report said.
And borrowing costs will increase. At present, inflation in the three major EEC economies – Poland, the Czech Republic and Hungary – is on average around 6.5%. If it ends up settling between 3-5%, 10-year bond yields in the region could reach 3.9% – 5.2% – a much higher level than in recent years.
Lyubka Dushanova, a specialist at State Street Global Advisors, believes that CEE central banks need to act, as the loss of credibility in the fight against inflation causes the market to weaken.
“It is difficult to distill geopolitical tensions from the macroeconomic framework. We will probably see a difficult period in the region “, Dushanova appreciated.