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Populist CEE governments set to squander favourable fiscal conditions predicts Fitch
The approach to current favourable fiscal conditions varies across Visegrad and other states in Central and Eastern Europe, Fitch Ratings said in a report released on April 25, with those states governed by rightwing populists likely to loosen policy, which will raise their vulnerability to external shocks.
Poland and Hungary are set to take advantage of the expected improvement of their fiscal positions this year and the next to increase spending and execute tax cuts, Fitch predicts. However, other economies in CEE plan to use the favourable economic environment to accelerate debt reduction instead.
Cyclical economic factors – rather than long-lasting policy adjustments – look set to align in a positive manner for Poland, the Czech Republic, Slovakia, Hungary and Slovenia in 2017 and 2018, the rating agency said. The main reason for the improvement is the increase in the use of EU funds, which will buoy investment to join private consumption as the main growth driver.
“We expect deficits in Hungary and Poland to be, respectively, 2.2% and 2.9% [of GDP], up from 1.8% and 2.4% in 2016,” Fitch claimed. Despite the increases, the deficits will remain below the EU’s criterion of 3% of GDP, Fitch added.
“In those two countries, the policy choice reveals a preference for stronger growth over deficit and debt reduction,” the agency noted. Hungary's state debt will remain high at over 70% of GDP by 2018, whereas Polish debt will rise to over 54%, compared to 51.1% in 2015.
In the Czech Republic, Slovakia, and Slovenia, the policy response will differ, Fitch predicted. These countries will retain a tight fiscal stance.
There will be a decline in the deficit in Slovakia to 1.1% of GDP by 2018, and a stabilisation at a low level of 1.5% in Slovenia, the agency forecasted. The Czech Republic will see an increase in the surplus to 0.4% in 2018. “Low government deficits in those three countries will support debt reduction and improve resilience to future fiscal shocks,” Fitch said.
The main risk to the scenario of improved fiscal positions across the region is weaker economic growth. Poland is particularly exposed, as it relies on dynamic GDP growth to power its large spending programmes, such as the universal child benefit and lowering of the retirement age, which is due to take effect in October.
Some question marks are also seen in the Czech Republic, Hungary and Slovenia, where elections will take place in 2017 and 2018, with election- related fiscal slippage a possibility.
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