Most decisive events for CEE economies in 2018

Elections in three countries, overhaul of social contribution system, launch of new car production, divergence in monetary policies are among most decisive events in CEE to come in 2018

‘What could be the most decisive event for your country's economy next year?'

Croatia: The most important economic event in Croatia for 2018 could be related to the intensification of the Agrokor restructuring process. However, in our baseline scenario, we do not expect more significant market shocks. The process is likely to continue to weigh on the growth profile, though in the baseline scenario this is still seen as having a modest impact. The fiscal position is anticipated to remain prudent; hence, we continue to see a rating upgrade by one notch as a baseline factor. The recently presented Euro Strategy document, apart from a kick-off of the public debate about EMU membership, could also mean that 2018 will provide more insight on how strongly the government is going to pursue this goal, and to what extent the process could get support from EU counterparties. We also could get a clearer outlook on the prospects for Schengen membership in the near term.

Czech Republic: We believe that the most important news for the Czech economy in 2018 will come from the political scene. Assuming that the new government will obtain support in the Parliament, the question is what ANO, the dominant party, will have offered to the parties that will give the government their support. Some of the possibilities that are relevant for the economy are a bank levy (as called for by the Communists) and a referendum on membership of the country in the EU (as called for by the SPD party). The other relevant political development is the outcome of presidential elections to be held in January. Milos Zeman, the current president, is a strong supporter of economic ties with China and Russia. All other candidates have much more pro-Western leanings. We see Zeman as the most likely winner of the elections.

Hungary: Parliamentary elections will be held in the spring, and according to polls, it is very likely that the incumbent Fidesz-led government will win its third consecutive term since 2010. The only question is whether the government takes a supermajority in the Parliament. Regardless of Fidesz getting a simple or supermajority of the mandates, we expect no changes in the fiscal policy looking forward, i.e. the ESA deficit should remain below 3% of GDP. The central bank embarked on a mortgage bond purchase program and the unconditional interest rate swap program starting in January. Both programs will likely last throughout 2018 and keep local government bond yields anchored at historically depressed levels.

Poland: Next year, all eyes will be on the MPC, as we see the rate hike, or rather a lack of it, as the most decisive event for the Polish economy next year. Recently, the pressure for the MPC to consider monetary tightening has been rising. Currently, few economists see the first rate hike already in 3Q18, but a majority of them expect monetary tightening to begin in 4Q18. At this point, we penciled in the first rate hike in 4Q18 as well. However, we see some risks that the policy rate might remain flat at 1.5% for a longer period of time. As the market prices in higher rates in a year, a 'no hike' scenario would keep interest rates lower than we currently expect and would potentially be negative for the zloty. The risks of such a scenario result from the fact that wage growth has not translated into more visible inflationary pressure, as core inflation is still low. Furthermore, its rebound may be outweighed by a lower contribution of food and energy prices next year, limiting the pressure for a rate hike.

Romania: Keeping the headline budget deficit at 3% of GDP in the context of generous pay hikes approved in the public sector is paramount for Romania in 2018. A slowdown in the economic growth will add pressure on next year's local budget revenues, while absorption of EU funds is surrounded by uncertainties. On top of this, important fiscal changes like the transfer of social insurance contributions from the employer to the employee will complicate the overall picture of budget revenues because it introduces some unknowns, like the increase in gross wages in the private sector to compensate for the effect on net wages. Potential upside for budget revenues is represented by additional social contributions likely to be collected in 2018, due to tighter legal aspects regarding tax avoidance by companies.

Serbia: Due to the disappointing economic performance in 2017 (negative one-offs in the agriculture and energy sectors), the focus of economic policymakers next year will be on growth-enhancing policies, which we put at the top of the major economic events list. The adopted budget proposal for 2018 envisages a notable increase in the capital budget, as the government announced a strong public investment cycle, increase in public wages and pensions, increase of personal allowance and introduction of tax breaks for start-ups. In addition, the government adopted a new bankruptcy law, which should stimulate 'creative destruction' in the economy. Besides the more expansionary economic policy stance, we also see February 2018 as an important month in which the successful IMF precautionary stand-by arrangement will end (although we expect a continuation of the IMF's presence in Serbia through the Policy Coordination Instrument).

Slovakia: As regards domestic affairs, next year should be relatively calm, as there no major political events scheduled. From an economic perspective, the new Jaguar Land Rover car plant in western Slovakia should start production towards the end of the year. JLR will be the fourth car maker in Slovakia and should contribute substantially to employment and economic growth. The ECB's QE program is expected to run at least until September; thus, the accommodative monetary conditions should be in place for a while. From an international perspective, Slovakia will closely watch the political situation in Germany, which is still in the midst of trying to form a coalition government, alongside Italian elections scheduled for the spring and developments on Brexit and the US administration's next steps.

Slovenia: Politics will definitely be in focus in Slovenia, as current PM Cerar lost public support ahead of parliamentary elections scheduled for July 2018 (last polls show that Cerar was at the bottom of the candidate list with 5.5% support). Current favorites in the race for new PM and the government are former comedian Marjan Sarec (List of Marjan Sarec) and leader of the Social Democrats Dejan Židan. However, in terms of economic policy, we do not expect any major changes down the road, whatever the outcome of the elections will be.

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