The economic growth of the 11 EU member states from Central and Eastern Europe (CEE-11) will slow down to between 2% and 3% on average in 2022 as the impact of Russia's invasion of Ukraine takes its toll across the region, Berlin-based Scope Ratings said on Tuesday, slashing in half its earlier projection of 4.6%.
The average inflation amongst the CEE-11, which includes Bulgaria, Croatia, Romania and Slovenia, will climb to about 10% this year, Scope said in its latest Central and Eastern Europe Sovereign Outlook 2022. This is seen as the result of the military actions, concurrent sanctions and disrupted supply chains, which are together pushing up the prices of commodities, such as oil, gas, metals, fertilisers and food.
Commodity prices were already riding high in the run-up to the war, widening Romania's deficit since the second half of 2021.
Moreover, the risk of prolonged inflation could put a squeeze on the region's exports, Scope added.
EU solidarity, in the form of additional liquidity from the European Central Bank (ECB) to countries outside the euro area as well as direct support from the EU, including by helping the region reduce its dependence on Russian oil and gas imports, looks set to soften the economic blow, according to the Scope forecast. Potential further support could be forthcoming through the COVID-19 EU Recovery and Resilience Facility.
This will be in addition to sharing the burden of helping people fleeing the war, with the EU setting aside almost 17 billion euro ($18.46 billion) to help Ukrainian refugees and the member states that host them.
Meanwhile, debt servicing costs for EU members from the CEE which are not in the euro zone, including Bulgaria, Croatia and Romania, have materially risen, with 10-year benchmark yields for government bonds in national currencies exceeding the 4% mark as of late March, data from the Scope report showed.
Among the economic advantages that could help keep the region afloat are central banks' foreign exchange reserves. Romania’s reserves cover nearly 90% of its short-term external debt, Scope noted. Euro area candidates Croatia and Bulgaria are likely to co-operate closely with the ECB, drawing benefits from their membership of the EU’s Exchange Rate Mechanism II and the banking union.