Good news on fiscal front for 2016 in CEE, apart from Romania

‘What are the policy implications of the first notification of fiscal deficits and public debt data?'

Croatia: According to the latest Eurostat figures, Croatia's budget deficit narrowed from 3.4% of GDP in 2015 towards 0.8% of GDP in 2016, suggesting another strong consolidation effort of 2.6pp, which also puts Croatia in second place among EU countries with the lowest deficit in the past year (after Ireland). The figure came in below official government estimates, where such strong improvement was mainly driven by the outperformance on the revenue side, with the biggest positive impact coming from an increase in tax revenues. Government debt also decreased vs. 2015 levels, with the figure declining to 84.2% of GDP in 2016. We see the released fiscal figures additionally favoring the expected EDP exit in May, while also paving the way for positive news flow in the upcoming credit rating assessments.

Czech Republic: In 2016, the general government surplus reached 0.6% of GDP and the debt to GDP ratio arrived at 37.2%. These figures were significantly influenced by the favorable development of the Czech economy and inflow of EU funds. The surplus of the central government budget reached CZK 62bn in 2016. Most importantly, the government decided recently to use this amount for amortizing part of the government debt. This means that the central government will issue a lower volume of bonds in the remainder of 2017. Only a small part of the surplus will be used for additional investment projects, with a need to issue bonds to finance them.

Hungary: The ESA-based budget deficit was 1.8% of GDP last year, while debt further mitigated to 74.1% of GDP. The favorable processes seen on the budget front in the last couple of years could create some room for the government to loosen this year, as the next Parliamentary elections are due in 2018. We do not expect that this year's deficit would exceed the 3% of GDP threshold. This is in line with the government's commitment to avoid EDP in the future. We expect this year's budget gap to be 2.7% of GDP, while the debt to GDP ratio may slightly mitigate further. There is an ongoing debate between Eurostat and the Hungarian authorities regarding the status of Eximbank, which should be reclassified inside the general government sector, according to Eurostat. We think that a change in the status of Eximbank would only result in a small increase in the historical debt level, while the declining trend should not change.

Poland: In Poland, the government deficit to GDP ratio has been decreasing since 2014 and amounted to 2.4% in 2016, according to Eurostat. On the other hand, the gross debt to GDP ratio has been increasing at that time and reached 54.4% in 2016 (a 3.3pp increase compared to 2015). This is slightly below the constitutional threshold of 55%, which, if exceeded, could result in various cost cutting procedures.
According to the MinFin, the government deficit in 2017 should increase to 2.9% of GDP; however, the forecast of the EC and IMF is above 3% of GDP. It is assumed in the budget plan for 2017 that real GDP will grow by 3.6%. Increased government spending is mainly caused by the social 500+ program (the Ministry of Family, Labor and Social policy expects a further increase in 2017 by PLN 6bn) and lower retirement age, but the government expects it to be compensated for by increased tax income (mainly VAT and CIT). We should keep in mind that, in 2016, government non-tax income was higher than in 2015, as a result of the LTE sale (PLN 9.2bn, which will not take place in 2017) and NBP profit (PLN 7.9bn).

Romania: Eurostat data shows that, based on ESA 2010 methodology, Romania had a budget deficit of 3% of GDP in 2016 and public debt of 37.6% of GDP. The initial estimate published by the Ministry of Finance was 2.8%. To the extent that the difference between the two estimates is due to the recording of one-off liabilities (which is our current assumption), the Eurostat release implies an excess cash payment for future years, which the government can afford (based on its generous cash buffer), but it is rather neutral for this year's ESA budget deficit, as the expenditure is water under the bridge from the accrual perspective. Based on these numbers, we do not see a material risk that Romania would be put under the Excessive Deficit Procedure already this year. However, according to the official explanations given by EC representatives to the media, it seems that the EC could react to the breaching of the medium-term fiscal objective (structural budget deficit of 1% of GDP) quite soon.

Serbia: As Serbia is still in a candidate status, there are no EDP related releases regarding fiscal developments. However, local MoF statistics show that Serbia also improved its fiscal position notably in 2016, as the deficit fell to only 1.4% of GDP and public debt was reduced to below 73% of GDP.
Budget execution in the first four months of 2017 is better than expected (surplus) and, according to PM Vucic's statements, the state budget could record a surplus for the whole of 2017. As for the policy implications of the more favorable fiscal picture, Vucic already announced that we could see an increase in pensions, public wages and the minimum hourly wage in the second half of the year, meaning that fiscal savings will be aimed at an increase of the expenditure side and not debt reduction, which would be more preferable. However, given the better than expected fiscal developments and expected solid growth momentum, such an expansionary policy would not push the fiscal figures outside our baseline scenario, as we see the deficit at 1.2% of GDP.

Slovakia: According to Eurostat's spring notification, Slovak fiscal deficit fell 1pp to 1.7% of GDP last year, matching the EU average (and only slightly higher than the Eurozone average of 1.5% of GDP). Government debt reached 51.9% of GDP in 2016, marking a drop of 0.6pp. Both the fiscal deficit and sovereign debt remain comfortably below the Maastricht criteria and further consolidation of public finances is expected. Therefore, no major policy changes are expected. However, the government announced its intention to bring more benefits of the better economic performance (in general) to people by altering some aspects of the labor code. These should include higher surcharges for weekend and night work, overtime, as well as work in a hazardous environment. We expect the consolidation of public finances to continue this year, mostly on the back of higher tax revenues, as the fiscal deficit is projected to fall to 1.3% of GDP (our forecast stands a bit higher, at 1.5% of GDP).

Slovenia: Steady fiscal adjustment continued in 2016, with Eurostat data showing Slovenia's budget deficit decreased to below the 2% mark, landing at 1.8% of GDP (vs. 2.9% of GDP in 2015). We also saw positive developments on the public debt side, with the figure starting a downward trend by breaking a few notches below the 80% of GDP mark (79.7%). We do not expect any major changes to occur this year, with 2017 expected to bring further consolidation, but at a somewhat lower adjustment pace, while the public debt trajectory is seen further drifting below 80% of GDP, especially taking into account the ongoing restructuring of the Slovenian debt profile.

Download The Full CEE Macroeconomic and Fixed Income Research