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Moodyʼs: negative CEE outlook driven by external environment

Factors such as a weakening external environment, moderating growth, and a lack of structural reforms stand behind the negative 2020 outlook for sovereign creditworthiness in Central and Eastern Europe (CEE), Moodyʼs Investors Service said in a report today.

The agency says that external headwinds is set to slow GDP growth to 3.3% in 2020 from 3.8% in 2019. Given broadly stable fiscal deficits, this growth will be sufficient to sustain the decline in already relatively low debt ratios. Still, Moodyʼs says that performances will vary by country.

"Resilient domestic demand and accommodative monetary and fiscal policy will support growth this year," said Steffen Dyck, a Moodyʼs vice president - senior credit officer and the reportʼs co-author. "However, the CEEʼs open economies are vulnerable to the deteriorating global environment and face persistent domestic pressure points."

The report adds that a dramatic shift in CEE demographics, a potential decrease in EU funding and slowing productivity growth have shifted the focus to structural reforms at a time when the political landscape is becoming less conducive to such reforms.

Moodyʼs forecasts further increases in the minimum wage in the region for 2020, despite the weakening economic environment. The report argues that while this could support short-term economic growth, increasing the minimum wage also risks eroding the regionʼs historical cost competitiveness, increasing unemployment, and worsening social inequality.