On the up
06 March 2024
In spite of pressing geopolitical tensions, the CEE region’s stock continues to rise
Image: 24novembers/stock.adobe.com
While the Central and Eastern Europe (CEE) region has faced a number of challenges over recent years, many in the industry are confident that its development will not be too strongly hampered. Towards the end of 2023, S&P Global Ratings predicted that “most CEE sovereigns are set to recover in 2024”, recording stronger macroeconomic conditions for the region compared to the 2022 year-end.
In its report, the firm rated the outlook for six of 11 sovereigns as stable. Two were categorised as positive, while three — the Baltic states — remain negative. The organisation explains that this is due to economic and security risks resulting from the war in Ukraine.
Published in August 2023, The National Institute of Economic and Social Research stated confidently that CEE’s emerging economies “are likely to become a new centre of gravity of economic growth in the EU”, with “very positive” GDP forecasts, increased industrial activity and growing foreign direct investment across the region.
As countries in the area continue to develop at pace, it is clear that CEE economies are becoming a major presence on the global stage.
Standing Out
Despite difficulties in the region, CEE firms continue to stand out in the global market. “It’s the combination of geographical proximity to main markets in old EU member states and skilled and less costly labour,” says Marek Drimal, emerging markets strategist at SocGen KB. Drimal also highlights infrastructure improvements over the past 20 years, which have been achieved, in part, thanks to EU fund inflows.
Drimal suggests that the CEE region’s success is due, to some degree, to the institutional stability that being an EU member state brings.
Considering how the region’s relationship with the EU will evolve in the coming years, Drimal states that there are two broad trends that should be kept in mind. “CEE’s economic growth over the past two decades, and EU enlargement, have resulted in the regional income per capita becoming closer to the average EU level,” he says — something he expects to continue in 2024 and beyond thanks to the region’s higher potential growth, investment inflow and a lower base of comparison.
That said, Drimal acknowledges that net EU revenues for CEE are expected to fall sharply over the next EU budget period as they begin to advance past the need for extra money from the common EU budget. If, and when, new countries join the EU, net revenues could fall further, he explains; resources are likely to be allocated to less-developed economies. “This transition of CEE countries from large net beneficiaries vis-à-vis the EU budget to perhaps net payers could be politically challenging,” he affirms.
The second trend that he brings up is, inevitably, politics and geopolitical tensions.
A Tense Climate
CEE markets, being geographically closest to Russia and Ukraine, have been more acutely affected than others by the ongoing conflict in the region — now in its third year.
A large number of restrictions have been put in place by different countries and organisations since the war began. Towards the end of February this year, and following the death of opposition leader Alexei Navalny, the US and EU introduced a number of additional sanctions on firms and individuals associated with Russia and businesses funding its military operations. While it’s accepted by many that these sanctions will have little to no material impact on the Russian economy — this is reported to have grown by approximately one per cent since February 2022 — they have required international firms to reorganise in order to stay compliant and meet the expectations of regulatory bodies and their clients.
Organisations have responded in a variety of ways to this. While simply exiting Russian markets may sound like the most obvious solution, the situation is far more complex. Selling Russian business back to Putin associates could just increase their revenue, and result in losses for the external firm. On the other hand, continuing business in Russia could prompt significant backlash from investors and cause reputational damage.
Raiffeisen Bank has had particular trouble with this, having been a significant and consistent presence in Russia for almost 30 years.
Despite reductions in Russian business throughout 2023 — with the Austrian bank reporting a 56 per cent reduction between Q2 and Q4 — reductions in payment transaction business with the country and a termination of all business relationships with Russian correspondent banks, Raiffeisen has seen significant profits since sanctions began.
However, Russian retaliatory restrictions mean that many western businesses are unable to take profits out of the country, with assets left inaccessible and unusable outside the bounds of the country. It’s a delicate situation and something of a losing game for the company. Moreover, it is an issue that seems far from resolution.
Several other international banks remain in Russia, despite political pressure: ING, Commerzbank, Deutsche Bank, OTP, Intesa SanPaolo, Unicredit and SEB remain active, as of February 2024.
Others have opted to amp up their operations to avoid Russian exposure. Further east, “KDPW put in place new rules for additional counterparty verification,” says Maciej Trybuchowski, CEO of the Polish CSD, outlining the depository’s tactics. “These were designed to ensure that our operations comply with regulations imposing restrictions on business relationships with entities with links to Russian and Belarusian capital, maintain the highest standards of counterparty risk management and mitigate any reputational risk.”
Aside from the elephant — or bear — in the room, the wider geopolitical landscape is far from rosy. Several countries are ramping up to elections this year, which tends to make markets at least a little nervous, and environmental catastrophe continues to be a critical issue across the board. On this, S&P Global’s rating report noted rising populism as a key risk for sovereign credit quality in the region.
The organisation highlighted protracted weakness in the euro area, uncertainty around EU fund disbursements and delayed fiscal consolidation as significant threats. Inflation was also included in the list, despite general acknowledgement that there will be improvements in this space over the next 12 months.
Keeping It Moving
Poland is emerging as a key jurisdiction as the CEE region continues to evolve, with SocGen KB’s Drimal stating that “the Zloty is our favourite CEE currency” and anticipating the country’s economic developments to exceed its peers.
KDPW’s Trybuchowski adds that the Polish bond market is particularly strong, with January’s reference rate exceeding inflation for the first time since February 2018. Malgorzata Rusewicz, CEO of the chamber of fund and asset managers Poland, goes on to note that bond funds amounted to 83 per cent of the total net sales of all funds over the past year. As a whole, the country is expected to grow by approximately 2.7 per cent this year and 3.2 per cent during 2025, a significant increase from 2023’s 0.2 per cent figure.
Drimal credits lower inflation rates, increased household incomes and improved social care benefits and government support schemes for this growth. He also highlights October 2023’s parliamentary elections as a factor, resulting in expectations that corporate governance may improve for state-owned companies.
Moving ahead, “digitisation is an important point,” Rusewicz affirms. “The asset management sector is experiencing too little acceleration in digitalisation compared to, for example, the banking sector.” While implementation of nascent technologies is sometimes criticised for having unclear or insufficient use cases, there comes a time when sectors must adopt new ways of operating or risk falling behind. “The limitations are, of course, costs and very restrictive regulations,” Rusewicz adds.
The CEE region has demonstrated its strength and resilience in the face of acute and global challenges. While it is difficult to predict what the rest of 2024 will hold, it seems that its upward trajectory is set to continue.
In its report, the firm rated the outlook for six of 11 sovereigns as stable. Two were categorised as positive, while three — the Baltic states — remain negative. The organisation explains that this is due to economic and security risks resulting from the war in Ukraine.
Published in August 2023, The National Institute of Economic and Social Research stated confidently that CEE’s emerging economies “are likely to become a new centre of gravity of economic growth in the EU”, with “very positive” GDP forecasts, increased industrial activity and growing foreign direct investment across the region.
As countries in the area continue to develop at pace, it is clear that CEE economies are becoming a major presence on the global stage.
Standing Out
Despite difficulties in the region, CEE firms continue to stand out in the global market. “It’s the combination of geographical proximity to main markets in old EU member states and skilled and less costly labour,” says Marek Drimal, emerging markets strategist at SocGen KB. Drimal also highlights infrastructure improvements over the past 20 years, which have been achieved, in part, thanks to EU fund inflows.
Drimal suggests that the CEE region’s success is due, to some degree, to the institutional stability that being an EU member state brings.
Considering how the region’s relationship with the EU will evolve in the coming years, Drimal states that there are two broad trends that should be kept in mind. “CEE’s economic growth over the past two decades, and EU enlargement, have resulted in the regional income per capita becoming closer to the average EU level,” he says — something he expects to continue in 2024 and beyond thanks to the region’s higher potential growth, investment inflow and a lower base of comparison.
That said, Drimal acknowledges that net EU revenues for CEE are expected to fall sharply over the next EU budget period as they begin to advance past the need for extra money from the common EU budget. If, and when, new countries join the EU, net revenues could fall further, he explains; resources are likely to be allocated to less-developed economies. “This transition of CEE countries from large net beneficiaries vis-à-vis the EU budget to perhaps net payers could be politically challenging,” he affirms.
The second trend that he brings up is, inevitably, politics and geopolitical tensions.
A Tense Climate
CEE markets, being geographically closest to Russia and Ukraine, have been more acutely affected than others by the ongoing conflict in the region — now in its third year.
A large number of restrictions have been put in place by different countries and organisations since the war began. Towards the end of February this year, and following the death of opposition leader Alexei Navalny, the US and EU introduced a number of additional sanctions on firms and individuals associated with Russia and businesses funding its military operations. While it’s accepted by many that these sanctions will have little to no material impact on the Russian economy — this is reported to have grown by approximately one per cent since February 2022 — they have required international firms to reorganise in order to stay compliant and meet the expectations of regulatory bodies and their clients.
Organisations have responded in a variety of ways to this. While simply exiting Russian markets may sound like the most obvious solution, the situation is far more complex. Selling Russian business back to Putin associates could just increase their revenue, and result in losses for the external firm. On the other hand, continuing business in Russia could prompt significant backlash from investors and cause reputational damage.
Raiffeisen Bank has had particular trouble with this, having been a significant and consistent presence in Russia for almost 30 years.
Despite reductions in Russian business throughout 2023 — with the Austrian bank reporting a 56 per cent reduction between Q2 and Q4 — reductions in payment transaction business with the country and a termination of all business relationships with Russian correspondent banks, Raiffeisen has seen significant profits since sanctions began.
However, Russian retaliatory restrictions mean that many western businesses are unable to take profits out of the country, with assets left inaccessible and unusable outside the bounds of the country. It’s a delicate situation and something of a losing game for the company. Moreover, it is an issue that seems far from resolution.
Several other international banks remain in Russia, despite political pressure: ING, Commerzbank, Deutsche Bank, OTP, Intesa SanPaolo, Unicredit and SEB remain active, as of February 2024.
Others have opted to amp up their operations to avoid Russian exposure. Further east, “KDPW put in place new rules for additional counterparty verification,” says Maciej Trybuchowski, CEO of the Polish CSD, outlining the depository’s tactics. “These were designed to ensure that our operations comply with regulations imposing restrictions on business relationships with entities with links to Russian and Belarusian capital, maintain the highest standards of counterparty risk management and mitigate any reputational risk.”
Aside from the elephant — or bear — in the room, the wider geopolitical landscape is far from rosy. Several countries are ramping up to elections this year, which tends to make markets at least a little nervous, and environmental catastrophe continues to be a critical issue across the board. On this, S&P Global’s rating report noted rising populism as a key risk for sovereign credit quality in the region.
The organisation highlighted protracted weakness in the euro area, uncertainty around EU fund disbursements and delayed fiscal consolidation as significant threats. Inflation was also included in the list, despite general acknowledgement that there will be improvements in this space over the next 12 months.
Keeping It Moving
Poland is emerging as a key jurisdiction as the CEE region continues to evolve, with SocGen KB’s Drimal stating that “the Zloty is our favourite CEE currency” and anticipating the country’s economic developments to exceed its peers.
KDPW’s Trybuchowski adds that the Polish bond market is particularly strong, with January’s reference rate exceeding inflation for the first time since February 2018. Malgorzata Rusewicz, CEO of the chamber of fund and asset managers Poland, goes on to note that bond funds amounted to 83 per cent of the total net sales of all funds over the past year. As a whole, the country is expected to grow by approximately 2.7 per cent this year and 3.2 per cent during 2025, a significant increase from 2023’s 0.2 per cent figure.
Drimal credits lower inflation rates, increased household incomes and improved social care benefits and government support schemes for this growth. He also highlights October 2023’s parliamentary elections as a factor, resulting in expectations that corporate governance may improve for state-owned companies.
Moving ahead, “digitisation is an important point,” Rusewicz affirms. “The asset management sector is experiencing too little acceleration in digitalisation compared to, for example, the banking sector.” While implementation of nascent technologies is sometimes criticised for having unclear or insufficient use cases, there comes a time when sectors must adopt new ways of operating or risk falling behind. “The limitations are, of course, costs and very restrictive regulations,” Rusewicz adds.
The CEE region has demonstrated its strength and resilience in the face of acute and global challenges. While it is difficult to predict what the rest of 2024 will hold, it seems that its upward trajectory is set to continue.
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