This report does not constitute a rating action.
Per capita growth in 11 Central and Eastern European (CEE-11) outpaced that in many other emerging markets (EMs) globally in the years before the COVID-19 pandemic. Average real GDP per capita in CEE-11 countries increased by over 4.2% annually over 2014-2019 and was only surpassed by growth in Asian EMs. Yet we project CEE-11 countries' growth will decline to 2.8% or below over the medium term. This could add pressure to the region's already strained public finances.
Chart 1
What's Happening
Three developments will impair growth in CEE-11 countries, with increasing demographic and labor supply constraints constituting the first one. Average employment levels in the region rose 5-10 percentage points over 2014-2019, while unemployment rates remain among the lowest globally. That said, CEE-11 countries are the only EM region globally whose population has declined. Recent censuses, for example in Bulgaria, indicate an even stronger population decline in the region than previously estimated. What's more, a disproportionate share of the population is aged between 50 and 65 and could retire from the workforce over the next few years.
Secondly, EU fund inflows will likely reduce over the longer term due to increasing income levels in CEE-11 countries. Cohesion and agricultural funds available to CEE-11 countries under the EU's 2021-2027 Multiannual Financial Framework are equivalent to about 19% of the region's annual 2021 GDP, compared with 28% of the annual 2014 GDP under the 2014-2020 framework. Additional Recovery and Resilience Facility (RRF) funds, at almost 5% of the 2021 GDP, will partially offset this decline over the short term but are only available for the next 2-3 years. Net fund flows from the EU to CEE-11 countries could shrink further if poorer candidate countries in the region join the EU. In fact, we would expect several CEE-11 members to become net contributors to the EU's cohesion policy in such a scenario.
Thirdly, past CEE growth benefited from exceptionally favorable financing conditions, which we do not expect to return. We think it is unlikely that inflation and central bank policy rates in CEE-11 countries will return to the lows of 2012-2020, given wage pressures from tight labor markets and higher global policy rates.
Why It Matters
Even if still strong in a global comparison, slower economic growth could put pressure on CEE-11 countries' public finances and derail long-term fiscal consolidation plans. We expect CEE countries will run some of the highest fiscal deficits of all rated sovereigns in Europe, the Middle East, and Africa over the next few years. This is because of generous social transfers, elevated defense expenditure, and rising interest bills. Government debt as a share of GDP is therefore set to increase for most CEE-11 sovereigns through 2027 and beyond. These fiscal dynamics could delay the disbursements of some EU funds, including RRF funds, which are partly contingent on governments' fiscal consolidation efforts.
What's Next
Nearshoring could help bolster foreign direct investments (FDI) into CEE-11 countries and support growth. The prospects of FDI flows into CEE-11 countries are affected by tight labor markets, higher energy costs, and Germany's ailing automotive sector, which impairs CEE-11 countries' manufacturing sector. That said, CEE countries could become an attractive destination for nearshoring in high value-added sectors, such as IT and business services. This is because of lessons drawn from the supply chain disruptions over 2021-2022, the increased political focus on strengthening the European economy, and CEE-11 countries' competitive labor costs and skilled workforce.
Related Research
- Sovereign Risk Indicators, Oct. 7, 2024
- Central And Eastern Europe Sovereign Rating Outlook Midyear 2024: Brightening, With A Few Dark Spots, July 25, 2024
- Elections, Defense Spending, And Interest Costs Will Keep CEE Fiscal Deficits High, Jan. 16, 2024
| Primary Credit Analyst: | Niklas Steinert, Frankfurt + 49 693 399 9248; niklas.steinert@spglobal.com |
| Secondary Contacts: | Karen Vartapetov, PhD, Frankfurt + 49 693 399 9225; karen.vartapetov@spglobal.com |
| Christian Esters, CFA, Frankfurt + 49 693 399 9262; christian.esters@spglobal.com | |
| Carl Sacklen, London; carl.sacklen@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.