OREANDA-NEWS. September 21, 2012. According to a new PwC report, Approaching storm. Central and Eastern Europe and the eurozone crisis, as the new wave of the global financial crisis approaches, Central and Eastern European (CEE) countries once again have serious challenges to face. The strong economic and financial links with Western Europe make the situation even more difficult, reported the press-centre of PWC. 

As recessionary triggers, along with waves of the current financial instability, are coming mainly from the eurozone, the CEE region faces two main risks.

The first danger is that, as with all the emerging economies, CEE countries may easily become victims of a possible global financial panic and the resulting ‘flight to security’ behaviour. The second danger is caused by the very strong links of the region with western European economies and with the fate of the euro. Both the deteriorating financial situation in the Southern part of the eurozone and the plausible widespread recession in the EU are likely to have a deep impact on CEE countries. Their ability to deal with a new threat crucially depends on the strengths and weaknesses of their respective economies. The significance of the Western Europe’s recession for the CEE countries obviously depends on the extent to which their economies are open to trade and dependent on the exports to southern European eurozone members.

Moreover, CEE countries with little room to manoeuvre in their macroeconomic policy will not be able to compensate for external shocks with any domestic stimulus. In contrast with the southern European eurozone members, the main financial problem of CEE countries is neither connected with the unreasonably high public debt, nor with the excessive consumption levels. Nevertheless, relatively low saving rates combined with high investment needs in these countries led to the accumulation of private debt owed to foreigners. The bigger the country’s exposure to foreign financing, the bigger the financial risk. Structural problems in the banking sector of CEE countries may greatly intensify the effects of the economic slowdown and of the external financial turmoil.

The main threats to the economic situation in the CEE countries, created by a possible new wave of the crisis, may be divided into four areas.

The recessionary impact comes mainly from the high dependence on exports to Western European markets, or on the highly sensitive exports of raw materials. The countries especially exposed to this risk are Slovenia, Bulgaria, Belarus, and Slovakia. Nevertheless, the threat is serious for all the countries in the region.

The room to manoeuvre for the macroeconomic policy in counteracting the recession is strongly limited in Slovakia, Slovenia, and Serbia, and somehow limited in all the other CEE countries except for Russia.

Possible problems with foreign debt are likely to be particularly strong in Belarus, which once again may face the risk of insolvency. The situation of Latvia, Hungary, Serbia and Ukraine can be assessed as dangerous as well.

Potential problems in the banking sector may seriously affect Bulgaria, and to a smaller degree Latvia, Croatia, Romania, and Serbia.

Our overall analysis suggests that the country which is most vulnerable to a crisis is Latvia, followed by Slovenia, Hungary, and Belarus. Very serious threats jeopardize the development of Bulgaria, Serbia, and Ukraine. Strong caution is also required in the case

of Lithuania, Croatia, Slovakia, Romania, Estonia, and Poland, and to a lesser degree the Czech Republic. Russia’s situation is much more comfortable, mainly due to the large room for manoeuvre with their macroeconomic policy.

Russian situation:

The performance of the Russian economy is strongly dependent on the global demand for energy and oil prices. Russia suffered a sharp GDP contraction in 2009, followed by a 4% growth in 2010-2011. Apart from improving revenues from energy exports, the growth was also fuelled by the rising industrial production. The growth rate is expected to remain on a similar level for the next couple of years. Much will depend, however, on the global situation. The Russian balance of payments is also strongly dependent on the situation of global energy markets. Nevertheless, the Russian current account balance remained strongly positive throughout the entire period of the crisis.

Unless the oil prices fall substantially, the relatively healthy financial sector and high level of foreign exchange reserves should secure the currency stability in the short run.