CEE Economic Outlook: Recovering Growth, Diverging Fiscal Paths, and Persistent Geopolitical Risks

Download Scope Ratings’ 2024 CEE Outlook here.

For Central and Eastern European EU members (CEE-11)*, we are forecasting a reduction in headline inflation from an estimated 11.2% last year to 4.6% in 2024 (Figure 1). Strong nominal wage growth and a potential wage spiral signal downside risks.

External deficits will remain relatively stable, owing to a gradually reversing regional terms-of-trade shock, constraining import growth amid lower domestic demand and sufficient natural gas reserves. At the same time, export performance continues to lag due to weak external demand.

Figure 1. Headline inflation, annual average, %

Fiscal Outlooks Remain Challenging

Fiscal outlooks remain challenging, though, as governments in the region balance the task of reducing budget deficits post-Covid with providing support to strategic sectors and boosting spending on energy, infrastructure, and defence. The challenge of financing persistent budget deficits is compounded by the rise in interest payments in 2024, notably for sovereigns with substantial borrowing requirements and shorter debt durations.

Governance risks also remain. The flow of EU funds is critical to the region’s economic performance. Substantial EU transfers to Poland (rated by Scope Ratings A/Stable Outlook) and Hungary (BBB/Stable) are blocked due to rule of law issues, curbing economic recovery. Meanwhile, higher policy rates in CEE countries compared with that in the euro area have complicated market-based financing.

Balanced Risks for CEE Sovereign Borrowers’ Credit Ratings

In terms of ratings, the balance of risks to ratings of CEE sovereign issuers is broadly balanced in 2024, after a series of Scope sovereign downgrades and Outlook adjustments in 2023. CEE sovereign downgrades in 2023 reflected structural economic risks and lingering impacts of the energy and inflation shocks, which affected real growth, public finances and economic resilience.

Scope Ratings downgraded Hungary (to BBB), Czech Republic (to AA-), and Poland (to A) last year, and maintained a Negative Outlook for Slovakia (rated A+). The Agency revised down the Outlooks for Estonia (AA-/Negative), Latvia (A-/Stable), and Lithuania (A/Stable), reflecting economic challenges and rising geopolitical tensions caused by Russia’s war in Ukraine. Outside of the EU, Scope has a Negative Outlook on Ukraine’s CC foreign-debt ratings, while, in January 2024, it revised the Negative Outlook on Türkiye’s B- foreign-currency ratings to Stable due to the recent shift towards more conventional monetary policy supporting a progressive rebalancing of the economy.

*EU CEE-11: Bulgaria , Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia

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Julian Zimmermann is an Associate Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Jakob Suwalski, Senior Director at Scope, co-authored the 2024 CEE Outlook.