Moody’s warns: Structural deficits in Romania, Hungary are set to widen. See why…

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The outlook for sovereign creditworthiness in Central and Eastern Europe (CEE) is stable, reflecting solid economic growth in the region, which offsets structural and institutional challenges, says Moody’s Investors Service in a report published recently.

The rating agency also expects that fiscal policy will remain expansionary in 2018 in most of the region.

However fiscal space will shrink for many CEE countries in 2018 as revenue growth slows in line with moderating economic growth, and interest costs gradually rise driven by the normalization of monetary policy.

In Moody’s view, this will exert pressure on the countries with the least favourable fiscal position, like Romania (Baa3 stable) and Hungary (Baa3 stable), where structural deficits are set to widen further.

The eight states included in the Moody’s report are: Romania, the Czech Republic, Poland, Slovakia, Bulgaria, Slovenia, Hungary and Croatia.

“Dynamic household consumption, and a continued recovery in investment will continue to drive growth in the CEE region,” says Daniela Re Fraschini, an Associate Vice President at Moody’s and author of this report. “This will help to further narrow the CEE region’s income gap with the remainder of the EU.”

Most rating and outlook changes for CEE sovereigns in 2017 were positive, driven by strengthening fiscal metrics, on the back of improving economic prospects. As a result, and in line with the supportive credit environment that Moody’s foresee for CEE sovereigns in 2018, seven of the region’s eight sovereigns now have a stable outlook.

Moody’s expects that growth rates in the CEE region will continue to exceed EU and euro area averages in 2018, but will moderate slightly to between 3 percent and 4 percent for most countries. This is due to slightly lower expected growth in the euro area, and the start of gradual monetary tightening in some CEE countries.

Despite the ongoing cyclical strength, Moody’s points out that structural impediments like demographic challenges and labour shortages are weighing on the CEE region’s potential growth.

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