Macroeconomic projections for central and eastern European (CEE) sovereigns have worsened significantly owing to the energy crisis, Fitch Ratings says. However, a strong start to this year means that the major downward revisions to our growth and public finance projections in our latest quarterly Sovereign Data Comparator are for 2023, with a recovery forecast for 2024.
 
We have lowered 2023 GDP growth projections for all CEE and Balkan sovereigns since June. The largest cuts are to Slovakia and the Czech Republic, sovereigns we had identified as being most exposed to a shutdown of Russian gas imports to the EU, which is now our baseline assumption. However, the transmission channel to regional growth has broadened as surging inflation and rising interest rates hit private-sector spending, and we see real GDP growth for the 13 sovereigns (the region’s EU members, plus North Macedonia and Serbia) falling to a median of 1.1% next year – the lowest since 2012, other than the pandemic-affected 2020 – from June’s projection of 3%.
 
North Macedonia and Serbia will grow fastest, supported by uninterrupted energy supplies, but weakness in key trading partners will keep their growth below trend. Estonia is the only economy we project to shrink next year. Five others will grow at less than 1%.

Fitch has increased inflation forecasts for all 13 sovereigns for 2022 and 2023 despite efforts to delay the pass-through of higher energy prices. Projections for 2022 were also raised due to the effect of dry weather on food prices and exchange-rate weakness. At 13.1%, 2022 median inflation is projected to be the highest since the late-1990s, with the peak at 20.5% in Estonia, where spot gas prices pass directly into the CPI. Only Slovenia is forecast to average single-digit inflation this year due to a lower starting point.
 
We see the regional median falling back into single digits in 2023 as growth slows and base effects lower energy price inflation. However, for four sovereigns inflation will remain in double digits, largely due to delayed pass-through of energy prices, and deteriorating inflation expectations are a risk to our forecasts. With regional central banks increasingly attuned to the growth-inflation trade-off we have generally made modest increases our policy interest rate forecasts.

The revenue boost from strong nominal growth in 1H22 means the main revisions to our general government balance forecasts are for 2023. We still expect a decline in the median deficit next year, but now by only 0.4pp to 4% of GDP, from 1.7pp to 3.3% in June.
 
Prospects for public finances among the 13 sovereigns are broadly similar to those in western Europe. Some CEE sovereigns have announced large energy cost support measures, but much higher marginal financing costs and generally shorter average debt maturities for the region’s non-euro sovereigns may constrain fiscal policy responses. Several sovereigns are using national windfall taxes to help fund these measures.
 
High GDP deflators often limit revisions to general government debt/GDP and our median projection for end-2023, at 50.7%, is little changed. Debt/GDP trajectories are a key rating sensitivity for many sovereigns in the region. Five of the six sovereigns with the biggest increase in debt/GDP projected between 2019 and 2023 have Negative Outlooks (Czech Republic, Estonia, North Macedonia, Romania and Slovakia). Bulgaria has a Positive Outlook owing to its euro accession process.
 

Fitch’s forecasts for 2024 are little changed, implying that a recovery as the impact of the gas crisis should ease significantly through new LNG supplies and alternative energy sources. We forecast median growth to rebound to 3.3%, while inflation will fall to 3.8%, allowing significant cuts in interest rates. An unwinding of energy-related support measures and the growth recovery will lower the median general government deficit to 3% of GDP (higher interest costs mean the primary deficit will narrow more) and put the median debt/GDP ratio on a downward trajectory.