Lower EU funds could be felt by CEE, due to Brexit, but pain could be limited

Big uncertainty as to how much Britain still needs to contribute to the EU budget

‘How much could CEE countries lose in EU funds due to Brexit?'

Croatia: EU funds are becoming more important in the Croatian fiscal and economic outlook, as the government and analysts expect a gradual acceleration of inflows and stronger contribution of EU projects to the investment cycle ahead. Thus, all major disturbances in the EU funding mechanism could make the Croatian investment outlook somewhat less rosy, but we do not see major risks to our baseline forecasts, as private consumption is seen as a key driver of growth in the mid run. In addition, we do not expect a complete withdrawal of the UK from the EU budget and we expect only a gradual reduction of the contribution in the mid run.

Czech Republic: We expect that the overall negative impact for this programming period will be relatively small and should not significantly affect the development of the Czech economy. We expect that Brexit will be more important for the next programming period. Firstly, the negative direct yearly impact on the Czech economy will be approx. EUR 1bn, in our view. But there could also be some indirect effects, as Brexit poses uncertainty about the future architecture of the EU budget in terms of taking on more sophisticated projects than in the current practice.

Hungary: The biggest risk for Hungary stemming from Brexit is a loss in the inflow of structural EU funds, as the economy should not take a big hit through other channels, in our view. The external position should not deteriorate to a significant extent due to the potential severing of trade relations with the UK or the lack of remittances from people working in the UK. In the 2014-20 cycle, Hungary could receive EUR 29.6bn worth of funds. Even a relatively small loss out of the whole amount would mean that the short-term growth outlook could weaken, as investment activity, excluding the effect of structural funds, remains subdued and could continue to do so.

Poland: Poland is the biggest beneficiary of EU funds in the 2014-20 budgeting period, as EUR 82.5bn was allocated to support regional development. With Great Britain leaving the EU, less money in the pot may lead to a reduction of net payments to Poland. While the amount of funds in the current budgeting period is not likely to be affected to a great extent (negotiations are to last for another two years), a new 'after Brexit' budget setup may become less favorable for less developed countries such as Poland. On top of that, Brexit threatens the amount of remittances, which will be closely correlated with immigration conditions and the possibility for Polish people to remain in the UK.

Romania: The absorption rate for the 2007-13 European Financial Framework is close to 80%, which means that Romania managed to attract structural and cohesion funds of almost EUR 15bn, thanks mainly to intensified efforts in recent years. The absorption under the 2014-20 European Financial Framework is still at an early stage and authorities are streamlining the procedures for better results in the future. The theoretical loss of EU structural and cohesion funds associated with Brexit is estimated at EUR 300-500mn per year, but this could materialize only after 2020. This financing gap could be covered by the expanded involvement of the private sector in large investments projects, including PPP and stronger bank lending to the corporate sector. Apart from the EU funds, the Romanian economy could be affected by smaller inflows of remittances (annual remittances from the UK are estimated at EUR 500mn) and weaker exports (goods shipped by Romania to the UK totaled EUR 2.5bn in 2016).

Serbia: As a candidate country, Serbia would not be strongly affected by the UK's decision. Firstly, pre-accession funds can be seen as a specific form of EU funding and their size is relatively modest, so we would not expect that EU officials would cut this category of funds in the case of a 'hard Brexit' from the EU budget, which is unlikely. Secondly, regarding trade connections, we see a limited impact, as Serbia could sign some bilateral deals with the UK (although exports to the UK are below 2% of total exports) and the macro outlook for the main trading partners is getting stronger. As for remittances, we do not see a notable slowdown of these flows, as Serbian emigration is mostly concentrated in continental Europe.

Slovakia: Until Britain leaves the EU, it will continue to meet its obligations to the EU budget - a net contribution of roughly EUR 9-10bn a year or around 12.5% of all total EU revenue. After March 2019, it is unclear what the arrangement will look like, but some loss of funds due to a smaller pot may be expected. The UK may still decide to take part and thus also contribute to some programs, especially in the area of R&D funding. Recently, EU Budget Commissioner Oettinger suggested that other net contributors, including Germany and France, will have to contribute more after Brexit, mitigating its negative impact on the budget. EU funding in Slovakia consists of roughly 2/3 for regional development (structural funds) and almost 1/3 is used in agriculture and rural development. Slovakia's current allocation under the 2014-20 structural funds is EUR 13.8bn, but this amount is unlikely to be significantly affected by Brexit, which may occur only close to the end of the programming period.

Slovenia: Slovenia is one of the best performers regarding its EU fund absorption rate and investment prospects in this country are heavily dependent on these funds, as seen last year, when the country recorded a slowdown and weakening on the investment side before the adoption of the new EU budgetary framework (the average growth rate decelerated from 3.1% y/y in 2015 to 0.1% y/y in 2016). That said, a reduction of the EU fund potential could bring more uncertainties regarding Slovenia's investment outlook. However, we do not expect that Brexit will heavily cut EU fund availability in the short run, so we do not see major risks to our baseline forecasts in the mid run.

 

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