The real emerging Europe

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CEE enthusiasts should not despair just yet. A number of the clouds handing over the region might turn out, on closer inspection, to have a silver lining.

To the casual observer, it can seem a long time since any good news came out of central and eastern Europe. 

Barely a day goes by without dismal updates on Ukraine’s economic situation, while the Russian government, not content with destabilizing its neighbour, appears determined to deter international investors by repeatedly disregarding the rule of law.

Even the most ardent Russia bulls were badly shaken by the arrest of apolitical oligarch Vladimir Yevtushenkov in mid-September and the seizure of his shares in domestic oil giant Bashneft. The subsequent passage of legislation limiting foreign ownership of media assets provides further proof that the regime is set on a course of isolation.

That will inevitably affect other countries from the former communist bloc, many of which still have important trade ties with Russia and are already feeling the pain of the latter’s ban on food imports from the European Union.

The collapse of Bulgaria’s third and fourth largest lenders over the summer, the repeated predations of the Hungarian government on its banking sector, and the recent removal of Albania’s long-serving central bank governor Ardian Fullani on charges of fraud have done little to dispel the widespread impression of the region as riven by corruption, bureaucracy and mismanagement.

Under the circumstances, it seems hardly surprising that the European Bank for Reconstruction and Development should in September have downgraded its forecast for GDP growth in the region this year to just 1.3%.

CEE enthusiasts should not, however, despair just yet. For one thing, a number of the clouds handing over the region might turn out, on closer inspection, to have a silver lining. Cash locked out of Russia and Ukraine, for instance, is already finding its way into other parts of the region. Similarly, ever-decreasing interest rates in home markets have prompted investors from core Europe to look further east for yield, a trend that can only be enhanced if the European Central Bank opts for further easing.

The impact of Russian sanctions should also be less extreme than initially feared. Food exports to Russia make up 2.5% of Lithuania’s GDP but are negligible for the rest of the region, accounting for just 0.2% of GDP in Poland and close to zero in most of southeastern Europe.

What is more, the EBRD’s gloomy economic forecast – weighed down by the dismal outlook for Ukraine and Russia – hides wide regional variation. For central Europe and the Baltics, the bank actually revised its 2014 figure up in September by 0.3 percentage points to 2.5% on the back of strengthening domestic demand in Poland and Slovakia.

Both those economies are expected to grow by more than 3% next year, as are Latvia, Lithuania, the former Yugoslav Republic of Macedonia and Kosovo. A downward revision to the outlook for Serbia and Bosnia was caused by the one-off effect of severe flooding in May.

Overshadowed by the grim tidings from Ukraine and Russia, a steady stream of positive news flow has been emerging from elsewhere in the region. A change of government in Poland has revived flagging support for the ruling, reformist Civic Platform party ahead of next year’s parliamentary elections. Romania’s determination to push ahead with its privatization programme and capital markets development is winning the country international admirers. Serbia is also tipped to become a rising regional star once plans to implement an IMF programme and push ahead with sales of state assets get underway.

A speedy resolution to the problems in Ukraine and Russia might be unlikely, but for investors prepared to look beyond the headlines there are plenty of bright spots elsewhere in the region.