Coronavirus poses challenges for Central European economies (CEE). But strong macroeconomic factors and banking system may work in its favour

Slovakia, region most affected by epidemic

Europe's emerging economy may stall due to the spread of the coronavirus. Market participants are now examining the potential impact of the disease on the region's economies and assessing the potential impact on the banking system.

Farms that are too open

According to analysts, the biggest problem is over-integration - the open economies of the countries in the region are now overly involved in both European and global trade and supply chains.

This phenomenon mainly affects manufacturing centers in Central Europe. According to Liam Peach, an economist at Capital Economics, exports in Hungary, the Czech Republic and Slovakia account for more than 80 percent of GDP. Thus, falling consumer demand is particularly affecting the development of the euro area economy.

Germany: For Central Europe, trade relations with Germany are a major concern - as trade with Germany accounts for 25-50% of countries' GDP, any slowdown could cause serious disruption.

Slovenia and Albania are the countries most affected by the disease in South East Europe. Both countries have significant trade flows with Italy - about 20 percent of GDP comes from trade with southern Europe, the European focal point of the coronavirus, half of which is accounted for by exports.

In addition, Croatia, Serbia and Bosnia are also significantly affected - 10% of their GDP comes from trade with Italy.

What happens when supply chains collapse?

Analysts also addressed the potential collapse of supply chains. The most vulnerable country in the region is Slovakia - because of its 45% added value on exports.

In addition to Germany, China plays an important role in the supply chains in Central and Eastern Europe. Italy is relevant for Slovenia, while South Korea is the dominant trading partner for Slovakia.

Another negative impact of the epidemic is the decline in tourism - tourism in Albania and Croatia accounts for 15-20% of GDP, but Hungary, Slovenia, Bulgaria and Bosnia are also affected.

Strong macroeconomic fundamentals

Europe's ever growing economy has strong macroeconomic foundations that can balance the risks outlined above.

Strong economic growth, falling borrowing costs and sound budgetary management have led to a significant decline in public debt as a percentage of GDP in the region over the last decade.

This means that most countries are able to introduce fiscal incentives to mitigate the effects of the coronavirus. Governments of countries can provide political support to curb weaker economic activity.

The budgetary situation in Hungary, Poland and the Czech Republic would allow for higher public expenditure.

Are there any monetary barriers?

Experts are less likely to agree on quantitative easing. According to Tim Umberger, a partner at East Capital financial firm, countries in the region are strong in both fiscal and monetary terms - though excessive inflation may limit the potential of some central banks.

The expert added that the combination of the FED Bank's extraordinary interest rate cuts and those expected by the European Central Bank could lead to short-term interest rate cuts in Poland and the Czech Republic. This could affect bank collateral and profitability, but Umberger said the European banking sector could withstand a more serious crisis.

Experts agree that the banking system is much stronger and that companies are in a much better position than during the 2008 crisis. Banks in Central and Eastern Europe today are only slightly exposed to the wholesale markets.

Situation is not critical

According to analysts, the impact of the coronavirus on Central and Eastern Europe will be mild, and economic stimulus could make a significant contribution to curbing the downturn.

Even in the worst case scenario, positive growth is expected in most parts of the region. In this case, Poland and Romania expect 2.5% and Hungary and the Czech Republic 1.5%. Slovakia may be the only country in the region to be economically affected by the virus

source:euromoney, autopro