Economic Growth Leads to Stable Outlook for Central and Eastern Europe

Despite some structural and institutional challenges in Central and Eastern Europe (CEE), Moody’s Investors Service’s outlook for sovereign creditworthiness in the region is stable, based on solid economic growth.

"Dynamic household consumption, and a continued recovery in investment will continue to drive growth in the CEE region," says Daniela Re Fraschini, an associate vice president at Moody's and author of the report. "This will help to further narrow the CEE region's income gap with the remainder of the EU." Seven of the region’s eight sovereigns have a stable outlook.

Moody’s analysts anticipate growth rates in the region will continue to surpass EU and euro area averages this year, but will moderate to between 3% and 4% for most countries, in part due to gradual monetary tightening in some countries.

Fiscal policy should remain expansionary in 2018 for most of the region, but the ability to raise tax revenues will diminish for many countries as revenue growth slows along with economic growth, and interest costs rise due to normalizing monetary policies, Moody’s said. “In Moody's view, this will exert pressure on the countries with the least favorable fiscal position, like Romania (Baa3 stable) and Hungary (Baa3 stable), where structural deficits are set to widen further.”

Challenges to the region include demographic factors and labor shortages, which could limit future growth. “In addition, the rating agency says that a less predictable policy environment will constrain the credit profile of some sovereigns in the region,” analysts said. “In this context, policy unpredictability will remain relevant for Poland (A2 stable) where judicial reform could potentially erode the rule of law and dampen economic sentiment and [Foreign Direct Investment] FDI.”

– Nicholas Stern, managing editor

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