The European Union is facing a crisis of migrants at its eastern borders, fueled, according to the EU bloc, by Belarus, tensions between Ukraine and Russia erupt again, Brussels is stuck in a dispute with the governments of Poland and Hungary on the rule of law and democracy, and Romania has no government. This is the political picture of the moment, which is beginning to make its mark on the evolution of financial markets in the region.
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.
Central and Eastern European financial markets, which are normally predictable, are suddenly dynamic, and the region faces a wide range of economic and geopolitical risks in recent decades, so international investors are beginning to monitor them closely. analysis carried out by Reuters, taken over by Agerpres.
Investors have long viewed the region as a kind of hybrid, where they could benefit from low EU interest rates, while the area was not completely out of Russia’s orbit, especially on the periphery.
Recent events are impossible to frame, but for those following market developments, the significant rise in inflation and the explosion in the number of COVID-19 cases are becoming important.
Pressures are rising in the region after years of relative calm
“Welcome back to emerging markets” is the title of a report by JPMorgan 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 by 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.
Economic consequences of political tensions
“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 of economic fundamentals from Central and Eastern Europe.
Increased imports and supply chain problems in key export sectors, such as automobile production, are likely to lead in Poland the the first trade deficit in 2012. The long-running dispute with Brussels could be costly if it is not resolved, Narain said.
JPMorgan estimates that the deterioration of current account positions involves deepening deficits in Poland, the Czech Republic and Hungary, which would lead to further depreciation of currencies and, along with increase in gas prices by 300% this year, would feed inflation and would force central banks to further increase interest rates.
“If the imbalance of the balance of payments proves to be long-lasting, we expect a currency volatility higher in the region “, the JPMorgan report shows.
And borrowing costs will increase. At present, inflation in the three largest economies in Central and Eastern Europe – 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 “, is the prediction that Dushanova makes.