Economic developments
In the wake of Slovakia’s recent downgrade by Fitch, we examine another crucial aspect of creditworthiness beyond the fiscal situation: the political landscape. Political dynamics in CEE countries have a significant impact on their relations with the EU, as evidenced by the strained relations between Poland and Hungary in recent years. As Poland prepares to inaugurate its new government today, we expect an improvement in its relationship with the EU and the subsequent release of RRP funds.
Conversely, Slovakia’s newly elected government is already on a collision course with the European institutions over a proposed law to dissolve the Special Prosecutor’s Office as of January. A reliable measure of this is the World Bank’s Worldwide Governance Indicators (WGIs), which assess the robustness of institutions in a wide range of countries.
We have selected the two most relevant indicators for the CEE region: Control of Corruption and Rule of Law. In 2022, the Czech Republic and Slovenia emerged as regional leaders, while Hungary’s control of corruption was only around the global median. Surprisingly, Croatia received the lowest score for rule of law, a situation we expect to change next year. We also expect Poland’s position to improve, while Slovakia is likely to see a further decline, continuing the trend since 2020.
Market developments
While the Czech koruna and the Hungarian forint started the week slightly weaker against the euro, the Polish zloty strengthened. On Tuesday, the government of former Prime Minister Morawiecki (who was appointed by the President to form a new government) failed to win a vote of confidence. As a result, the parliament chose Donald Tusk to be the new prime minister and form the new government. The bond market has been mixed since the beginning of the week. In Romania, Prime Minister Ciolacu said that the 2024 budget deficit will be planned so that it does not exceed 5% of GDP. Slovakia plans to reduce the 2024 budget gap by 0.5 percentage points, bringing the general government balance close to -6% of GDP.
