The Balkans’ Balky Bloc Blemish

Balkan markets were further battered by East-West tensions over Ukraine after early-year slippage on pesky economic and political plights rekindled by rioting in the former flashpoint of Bosnia-Herzegovina which was the continent’s last major military conflict. Romania’s relative safe haven status faded as the ruling coalition again splintered and the president refused austerity steps in the IMF’s renewed precautionary standby. The budget gap is under the 3 percent of GDP recommended EU standard allowing the executive to push back on fuel and property taxes, as monetary policy was also loosened with a 25 basis point rate drop to 3.5 percent following bank reserve requirement easing to boost growth. Despite a modest current account deficit the currency has been around 4.5 to the euro on low foreign ownership of local debt, as equity players anticipate privatization offerings in key industries. Fiscal friction was also apparent in Bulgaria as the new leadership honored its campaign promise to raise spending to just under the 2 percent of GDP cap under longstanding rules. Civil servant wages and pensions increased 10 percent and gross public debt is only 20 percent of output, but fiscal reserves approach the minimum needed to sustain the currency board. The administration plans further investment outlays to assist its poor popularity almost at the level of the previous discredited regime after a series of scandals and crisis-related policy mistakes. The domestic stock market index has been up double-digits in advance of additional listings as sovereign spreads on the 2015 benchmark widened but remain a minor EMBI weighting. In the former Yugoslavia Serbia’s IMF estrangement may be prolonged with fresh elections as the March Article IV report on Croatia cited “very difficult” consecutive annual recessions since 2008. Internal demand is “depressed” on corporate and household debt deleveraging and 15 percent unemployment. A revised business bankruptcy process has helped and should be adapted for consumers, it advises. Hiring restrictions have been removed, but social welfare costs continue to stifle the labor market. With high state company arrears and losses public debt exceeds 60 percent of GDP and tax and health sector reforms are “urgent priorities” The exchange rate anchor with the euro has required occasional intervention, and although bank capital adequacy is 20 percent of assets, profitability is off on government enterprise exposure, the Fund admonished.

Russia recently reasserted its influence in Hungary as well with a EUR 10 billion energy loan as Prime Minister Orban welcomed the deal after once condemning Gazprom’s presence. Opposition parties have tried to unify to defeat his re-election bid, but he controls the media debate and recently got EU court endorsement for the signature FX conversion program. Foreign banks have taken big write-downs and OTP’s share price has been hammered by the move along with recognition of its sizable Ukraine operation. The central bank headed by a close ally continues to slash rates to record lows as the forint also bobbles in the messy goulash.