With popular elected leaders and strong growth in their economies, the sometimes-feisty CEE nations are standing tall—and keeping an eye on corruption and labor costs.
The Visegrád Four—the Czech Republic, Slovakia, Hungary and Poland—have been shaking things up. Once in the vanguard of reform, they are taking a line increasingly independent of Brussels. Some have refused to share refugee quotas. Others have enacted controversial changes to the judiciary while expressing a desire to preserve national values. Poland, for example, is currently at odds with the European Commission over a range of new laws. Its Law and Justice government seems to sympathize with Hungarian prime minister Viktor Orbán’s desire to forge an “illiberal democracy.”
But EU efforts to bring the Four to heel have been complicated by these populist governments in Poland and Hungary being, well, popular—Orbán’s Fidesz party is heavily favored to win re-election in April against a rudderless opposition—and by their booming economies, helped ironically by EU structural funding. Visegrád Four GDP expanded by over 5% last year on top of a robust 2016, with growth broad based and sustainable. Individual countries have been as impressive: Hungary grew by 4.8% in Q4, and Poland by 5.2% in Q3.
Nor are investors staying away. The region has consolidated its key position within the global automaking chain and increasingly attracts companies from China and elsewhere in Asia into a diverse range of sectors. Meanwhile, Poland and Hungary seem set on curbing foreign influences within strategic sectors, at the same time building national champions to benefit from economies of scale and play a wider regional role. In Poland, PKN Orlen, the state-controlled refiner and oil and gas producer, is taking over rival Lotos, which is a quarter of its market cap: €9.5 billion ($11.7 billion). And PKN has upped its stake in the Czech Republic’s Unipetrol to 94%.
Bloomberg’s economic sentiment indicators (ESIs) say it all, with the weighted average for the region in February 2018 reaching 110.4, the best level since March 2008 and consistent with growth reaching 5.5% this year. Hungary’s ESI climbed to the highest level in the series’ 23-year history. Meanwhile, banks go from strength to strength. In Hungary, 2017 after-tax profits in the sector rose by 50% year-on-year to 632 billion Hungarian forint ($2.4 billion), thanks to a lower bank levy and changes in risk-provision requirements; profit was equivalent to ROI of 16.1%. In Poland, Bank Pekao (the second largest lender, now part of the PZU Group), reported a doubling in net profits last year to 1.05 billion Polish zloty ($301.5 million) in the fourth quarter of 2017.
Regular observers are unsurprised. “For investors, this region is good news; and things will get even more interesting this year,” says Charlie Robertson, global chief economist at Renaissance Capital. He dismisses fears that investor concerns will dampen growth. “Unemployment is negligible. Wages are booming and boosting consumption, while investment is strong, as the region continues to move up the value-added curve.” He suggests the only real worries are that rising wage levels could impact the current account deficit, leading eventually to higher inflation and interest rates.
However, concerns about transparency have grown. Transparency International’s Corruption Perceptions Index puts Hungary in 66th place out of 180, citing “one of the most alarming examples of shrinking civil-society space in Eastern Europe,” and highlighting government attacks on NGOs, notably the Soros Foundation. Transparency International also pointed to the growing number of public procurements and negotiated public tenders, which give opportunities for cronyism: In Hungary, these have risen from 4.7% to 9.4% of GDP since 2012.
Mateusz Szczurek, a former Polish finance minister who is now the lead regional economist for Central and Eastern Europe at the European Bank for Reconstruction and Development (EBRD), says labor shortages are also becoming a big issue amid signs that some economies may be close to overheating. A recent EBRD survey found that some 60% of EBRD’s local businesses identified labor shortages as their number-one challenge. Szczurek argues that companies will need to focus on producing more value-added components in such key sectors as automotives, IT, R&D and pharma—and that there are considerable opportunities in the green economy. “Due to supply constraints, 2017 will be as good as it gets: Growth will be healthy, but the acceleration phase is behind us,” he says.
Robertson remains bullish though. “After the interruption of 2008–2016, this region is enjoying rocket-propelled growth. This is a real reconvergence story, with most economies in the CEE region back on track.”
