On the radar
Fitch downgraded Slovakia to ‘A-‘ with stable outlook.
Inflation in Hungary fell to 7.9% y/y in November. This week, the focus will be on inflationary developments in CEE.
Trade balance in Hungary and Slovakia remained in surplus in both countries in October.
Czech unemployment rate was stable at 3.5% in November.
Last Friday, S&P left Hungary’s rating outlook unchanged at BBB minus. The outlook remains stable.
Today in the morning, the Czech Republic will release November’s inflation rate, while Slovakia and Slovenia will publish October’s industrial production growth.
Economic developments
On Friday, Fitch downgraded Slovakia’s credit rating to ‘A-‘ with a stable outlook. Fitch’s rating of Slovakia is one notch lower than Moody’s (A2, negative outlook) and two notches lower than S&P (A+, stable outlook), which naturally raises the question of whether other rating agencies will not follow Fitch’s assessment. Fitch’s decision was mainly driven by deteriorating public finances, represented by a rising public debt ratio and a widening budget deficit, as well as an uncertain fiscal consolidation path.
Fitch expects the general government debt to exceed the pandemic peak of 61.1% of GDP in 2021 and to continue rising over the medium term. In addition, Fitch has identified a significant deterioration in governance, which could potentially weaken Slovakia’s EU relations and/or damage policy credibility, as a credit negative development. Moreover, the budget deficit is projected to widen to 6.0% of GDP this year (from just 2.0% in 2022), mainly due to a sharp increase in spending. As a result, Slovakia may face relatively higher borrowing costs, leading to wider spreads versus German Bunds.
Market developments
CEE currencies weakened against the euro throughout the week. The simultaneous move suggests that global factors are at play, as investors seem to be shifting expectations that major central banks will start easing monetary policy sooner rather than later amid falling inflation and weak economic performance. The shift in expectations has also had an impact on the bond market, as long-term yields have continued to fall, mirroring developments in the core markets. This week, markets in the region will focus on the meetings of the Fed and the ECB, especially in the context of the recent decline in inflation, although both central banks have ruled out any change in policy rates.
