Summary

Andras and Barnabas began their talk by discussing the return of political and macrofinancial instability to Ukraine, trumping 2019 hopes for a period of stability, as the government has in effect lost its majority. Fiscal financing difficulties are also acute, but the government appears to have agreed with the IMF, making a virtual mission and a review of the IMF loan programme this year likely. Disbursement of the first tranche of the EU macro-financial assistance is also imminent. That at least delays the need for the quasi-quantitative easing that has been discussed at the central bank and the ministry of finance lately – they expect no mass printing to start until 2Q21 at the earliest. Once the most acute financing needs are serviced, probably in mid-2021, they expect a more decisive move away from inflation targeting to begin. That means that hryvnia devaluation to a rate of 30 to the dollar remains likely by end-2021 – though in the short term, Millennium expects some revaluation as a decline in imports driven by a new lockdown, and news of the IMF mission, prop up the currency. Turning to the CEE4 (Czech Republic, Hungary, Poland, Romania), Andras and Barnabas discussed macro trends affecting monetary policy, fiscal policy, EU funding, and political stability in the region. As the pandemic and its effects will determine economic outcomes in the coming year, central banks in the region will continue easing until at least 2Q21, albeit sometimes by alternative means instead of slashing rates further. Currencies should remain relatively stable in all four countries, with risks to the FX rate being mainly of political nature: uncertainties about the outcome of EU budget negotiations add volatility to both the PLN and HUF rates, while coalition negotiations in Romania present a downside risk to the RON. On the fiscal policy side, however, they expect gradual tightening as countries battle with increasing deficit and debt levels, with little budgetary elbow-room left after the generous support schemes introduced during the first wave of infections. As all four countries would rely heavily on EU funds during their recovery, a delayed EU budget due to the Polish and Hungarian veto would hurt their economies, but Andras and Barnabas believe that the next budget will be adopted by the end of the month – with some minor tweaks to the rule of law mechanism to appease Warsaw and Budapest. The poor management of the pandemic and the ensuing economic downturn will usher in an era of increased political instability in the region. Governing parties in the Czech Republic and Hungary may suffer losses at upcoming elections in 2021 and early 2022, respectively, while in Poland internal tensions jeopardize the majority of the governing coalition and the position of Prime Minister Mateusz Morawiecki.

Topics