This report does not constitute a rating action.
Central and Eastern European (CEE) small open economies demonstrated the resilience of their external positions to external shocks. After significant current account deficits triggered by the surge in energy prices in 2022, CEE economies' aggregate current account recovered quickly in 2023, and we forecast it will be broadly balanced over the next few years. The reduction in energy prices that followed Europe's shift away from Russian energy has helped. But CEE countries' external resilience is also due to their competitive and increasingly diversified exports--including in services--amid low domestic labor costs, ample human capital, and the proximity to advanced European countries. Coupled with the steady flow of foreign direct investment (FDI) and EU transfers, we believe these factors will mitigate CEE countries' balance of payments pressures.
What's Happening
CEE economies underwent a strong external rebalancing following the terms of trade shock in 2022 in the wake of the Russia-Ukraine war. Due to their high energy intensity and strong dependence on energy imports, including from Russia, all CEE economies' current account positions worsened in 2022. The deterioration was more pronounced than in most other European countries, with Hungary, Romania, and Slovakia, among others, suffering account deficits of about 10% of GDP in the third and fourth quarters of 2022--the highest level in the past 15 years. Only two quarters later, CEE countries' external positions had recovered, with the annual average current account deficit shrinking to 0.5% of GDP in 2023, from 4.8% in 2022. We expect seven out of 11 CEE countries will operate current account surpluses in 2024 and beyond.
Why It Matters
Several structural factors weigh on CEE economies' current account positions. These include still elevated energy costs, compared with average levels before the Russia-Ukraine war; the appreciation of real effective exchange rates amid high wage inflation, which is partly caused by some of the tightest labor markets globally; and elevated government spending, including on social transfers and defense, which typically increases imports. What's more, CEE countries' goods exports recently started to suffer from the protracted weakness in Germany's automotive sector, which is critical to many CEE economies' manufacturing sectors.
External rebalancing not just resulted from the decline in energy prices but also from other region-specific factors. These include CEE economies' external competitiveness, supported by the region's comparatively low labor costs, which amount to one-quarter to one-third of those of advanced EU states. The gradual geographic diversification of CEE exports to non-EU markets that happened over the past years also played a role. Macroeconomic policy choices, including the flexible exchange rate regimes in some CEE countries, also helped.
The emergence of CEE economies' competitive export-oriented services sectors is another supporting trend. In contrast to the early 2000s, CEE countries' services sectors are no longer dominated by tourism but business services, IT services, and transport and logistics. Services sectors benefited from CEE economies' ample human capital--including high educational attainment--low tax rates, and their proximity to Western Europe. As a result, all CEE countries now run sizable external services surpluses of 3%-5% of GDP on average. These surpluses often exceed the combined deficits in the external goods and primary income accounts.
What Comes Next
Despite the challenging global context, we expect CEE sovereigns' external profiles will remain strong and support our CEE sovereign ratings. Apart from a few exceptions--notably Romania, which runs substantial twin current account and fiscal deficits--we project CEE countries' current accounts will remain healthy. Moreover, current accounts will likely be overfinanced by net FDI and EU transfers. This will support net external deleveraging and keep CEE sovereigns' foreign exchange reserve positions adequate, providing an additional buffer against future external shocks.
Related Research
- Central And Eastern Europe Sovereign Rating Outlook Midyear 2024: Brightening, With A Few Dark Spots, July 25, 2024
- Your Three Minutes In CEE Sovereign Ratings: The Economic Nexus Between CEE Countries And China, July 4, 2024
| Primary Credit Analyst: | Ludwig Heinz, Frankfurt + 49 693 399 9246; ludwig.heinz@spglobal.com |
| Secondary Contacts: | Karen Vartapetov, PhD, Frankfurt + 49 693 399 9225; karen.vartapetov@spglobal.com |
| Carl Sacklen, London; carl.sacklen@spglobal.com | |
| Additional Contact: | Sovereign and IPF EMEA; SOVIPF@spglobal.com |
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