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Strong growth but structural challenges in CEE: Moodyʼs

Moodyʼs Investors Service has released a report about the CEE regionʼs economic outlook for the year 2019, saying that the regionʼs growth is strong, but somewhat slowing, while the tightening of global funding conditions may pose challenges, according to a press release sent to the Budapest Business Journal.

The report is titled "Sovereigns - Central & Eastern Europe: Stable 2019 outlook balances steady growth and institutional challenges amid a less benign global environment." Moodyʼs notes that it is an update to the markets and does not constitute a rating action.

"We expect the CEE region to record robust but slowing year-on-year growth, on the back of continued strong domestic demand in the context of decelerating European-wide and elevated trade tensions," says Olivier Chemla, a Moodyʼs vice president, senior analyst and co-author of the report.

The ratings firm expects the CEE region to grow by 3.7% in real terms, with differing economic performances for the countries concerned, ranging from 2.5% in Croatia to 4.3% in Slovakia. Moodyʼs expects strong wage growth and record low unemployment to maintain the drive in private consumption. Still, slowing euro area growth and a gradual normalization of monetary policies are expected to impact macroeconomic conditions, it adds.

In the case of Romania and Poland, Moodyʼs notes that there is a risk in loosening fiscal policy and the widening of the deficit, due to presidential elections in the former, and parliamentary elections in the latter country. For the whole region in general, the report notes that slowing growth may cause a deceleration in tax revenues, and a deterioration in headline budget positions, as some spending will be difficult to unwind.

Even so, the relatively high level of growth will continue to support a fall in debt levels in all CEE countries, barring Romania. The countryʼs fiscal deficit stays above the threshold for debt stabilization, the company notes. All in all, Moodyʼs anticipates that fiscal metrics will generally stay supportive of its assessment of the CEE countriesʼ fiscal strength.

The report singles out Hungary, Poland, and Romania for increasing political risks and policy uncertainty due to the weakening rule of law, decreasing institutional independence, growing tensions with EU institutions, and the rise of anti-establishment parties. The report notes that the tensions have yet to impact consumer or business confidence, but have resulted in a deterioration in Moodyʼs assessment of institutional strength in the region.