Growth of the economies in CEE
is proceeding

Date: 13.1.2011

Erste Group Research expects an average real GDP-growth of 2.9% in CEE (excl. Turkey) in 2011. Growth expectations are based on already finished adjustments of current accounts, rising domestic demand and limited necessity for fiscal consolidation.

From our point of view the main risks of this growth scenario are the unwillingness to reforms of the particular governments as well as a possible tightening of monetary policy ahead of the Euro Area (e.g. increase of the base rate during the course of the year).

The sum of the progress in consolidation efforts of the respective budgets must be viewed as positive. The results are clearly above those in the Euro Area. For instance, with the exception of Hungary, national debt in CEE is below 60% of the GDP and is thereby significant lower than in the Euro Area.

Concerning the insurance costs for the risk of default of single states (so-called “CDS Spreads”) at the moment market participants especially take the current issues “budget and fiscal deficit” into consideration. Thereby countries in CEE benefit from a significantly lower level of national debt, an early start of consolidation efforts and this combined with higher growth expectations regarding economic activities.

With a view to global risks central banks in CEE act very carefully. Czech Republic and Poland have postponed the first rate hike to the first half of 2011. However, Hungary surprisingly hiked rates already in the fourth quarter of 2010, whereas Ukraine cut rates. Also Romania plans a reduction of interest rates for 2011. From our point of view CEE exchange rates remain volatile this year but the extent of these fluctuations should come down.

Expectation for CEE Equity markets

In total the economic recovery is clearly noticeable. In our opinion, the structure of growth will improve in 2011 because the ratio of domestic and foreign demand should balance out gradually. Nevertheless, export contribution will decline in the present year. We assume, that global economic growth rates will slow down slightly in the current year, whereas it will continue to improve in CEE (ex. Ukraine, Czech Republic and Slovakia).

A driving force for equity markets is the existing liquidity. In general, capital markets in the global “Emerging Markets” recognise record inflows. Until now primary Latin American and Asian stock exchanges benefited from this fact. Now, we also expect especially Eastern European stock exchanges to benefit in the present year because of the good fundamental situation.


Author:
Paul Severin,
Managing Director Investment Strategies
ERSTE ASSET MANAGEMENT
President of ÖVFA
13 January 2011