Delayed fiscal consolidation is one of five potential negative credit risks for Central and Eastern European (CEE) countries over the next year, according to S&P Global Ratings.
We see five key risks to the creditworthiness of CEE countries. These include prolonged weakness in the eurozone, uncertainty over EU fund disbursements, delayed fiscal consolidation, sticky inflation and the potential for rising populism and heightened geopolitical tensions, according to the report ‘CEE Sovereign Outlook 2024: Five Risks To Watch’.
We expect Poland’s public deficit to remain high at 5 per cent of GDP in 2024, after 5.6 per cent of GDP this year, as the new government seeks to deliver on its pre-election fiscal promises. Downward pressure on CEE sovereign ratings could increase if similar fiscal risks are accompanied by other shocks, including a decline in investor confidence, EU fund drawdowns and economic growth, according to the report.
The agency estimates that fiscal deficits in Central and Eastern Europe will remain among the highest in Europe.
Fiscal deficits in Central and Eastern Europe will remain among the highest in Europe, the Middle East and Africa (EMEA) next year, nullifying the government’s debt reduction plans. This is largely due to several policy decisions taken by governments in recent years. These include fiscal support measures against rising inflation and higher energy costs, such as tax cuts and higher social spending, as well as higher borrowing costs. But also additional defence spending, which in some countries exceeds North Atlantic Treaty Organisation (NATO) commitments of 2% of GDP; Poland is aiming for 4% of GDP this year, and the Baltic states are likely to spend close to 3% of GDP annually over the next few years. This will contribute to fiscal deficits of 2-5% of GDP in 2024, with Romania, Slovakia, Poland and Hungary among the 20 countries with the largest fiscal deficits of all 85 assessed countries in the EMEA region, according to the report
The use of EU funds will require continued policy efforts and fiscal prudence, it also stated.
For some CEE countries, the ability to utilise EU funds and channel them into effective spending has been limited by institutional and administrative constraints. Addressing these issues requires coordinated policy action, which may prove challenging in countries where the stability of government coalitions may be tested – such as Bulgaria, the Czech Republic, Slovenia and Poland – or in those facing the start of national electoral cycles in addition to the European Parliament elections in June 2024. In addition to other conditions, parts of EU funding – such as disbursements from the Reconstruction and Resilience Facility (RRF) – are also linked to the EU’s view of the sustainability of public finances. This implies adherence to the EU’s agreed fiscal consolidation paths, it concluded.
Earlier in December this year. S&P Global Ratings maintained Poland’s ratings at A-/A-2 in foreign currency and A/A-1 in local currency. The outlook on the ratings was maintained at stable. Poland will record a general government deficit of 5.6% of GDP in 2023, 5% of GDP in 2024, 3.9% of GDP in 2025 and 3.2% of GDP in 2026 (compared to -3.7% of GDP last year).
According to the agency, general government debt will fall to 48.7% of GDP this year (from 49.3% of GDP last year), before rising to 49.8% of GDP in 2024, to 51.6% in 2025 and to 52.4% in 2026.
Source: S&P and ISBnews
