Eastern Europe Faces Budget Woes as Recession Deepens
Recessions in Hungary and Romania deepened and Slovakia’s gross domestic product contracted for a second quarter, depleting government coffers as the countries struggle to keep their deficits in check.
Gross domestic product in Hungary shrank an annual 7.6 percent in the second quarter, Romania’s GDP contracted 8.8 percent and Slovakia’s output dropped 5.3 percent, according to state statistics offices today.
Recessions in the former communist economies left their governments struggling to live up to European Union budget rules as rising unemployment drains public funds and depletes tax revenue. For Romania and Hungary, agreements on international bailouts are at risk, while Slovakia, the only euro region member, was warned by the European Commission for exceeding the bloc’s 3 percent budget gap limit.
“The pressure on budgets will intensify next year when unemployment is set to peak,” said Juraj Kotian, an economist at Erste Group Bank AG in Vienna, before today’s GDP reports. “The automatic stabilizers like welfare payments will eat up much more budget revenue and the governments won’t have much ammunition left for fiscal stimuli.”
Deepening Recession
The Czech Republic’s recession probably also deepened last quarter. The country’s statistics office may report the economy shrank 4.2 percent, according to a Bloomberg survey, putting pressure on the state budget before October elections.
The Hungarian forint strengthened 0.3 percent to 270.3 against the euro at 5:33 p.m in Budapest, from 269.55 late yesterday. The Romanian leu gained 0.2 percent to 4.212 the euro, while the Czech koruna was little changed at 25.809.
There are some signs Europe’s recession is waning. Slovakia’s economy shrank at a slower pace than in the first three months and beat the median in a Bloomberg survey. Germany and France today reported that their total production grew, as two of the region’s largest economies exit recession.
“We expect the eastern European economic decline to slow in the second half of the year,” Zoltan Torok, an economist at Raiffeisen International Bank-Holding AG in Budapest, said in a phone interview today.
Signs of a western European recovery “provide hope that the already climbing export figures finally result in better manufacturing output” in the east, Janos Samu, a Budapest-based analyst at Concorde Securities, said in a note to clients today.
Even so, eastern European government efforts to keep budgets in check, as rising unemployment drains funds, will hinder a recovery next year, said economists including Nicolaie Alexandru-Chidesciuc, chief analyst at ING Bank Romania in Bucharest.
‘Will Take Time’
Slovakia’s 2009 budget deficit will be almost three times the government’s original target of 2 fast cash personal loans.1 percent of GDP. In the Czech Republic, the budget gap reached 76.2 billion koruna ($4.1 billion) in the first seven months, double the full-year target.
Slowing household spending in the Czech Republic and Slovakia came after their unemployment rates rose to more than a three-year high as companies cut jobs to adjust to shrinking markets.
“It will take time until the Slovak economy returns to a pre-crisis level,” when it was one of the fastest growing economies in the 27-nation EU, said Jan Toth, an economist at UniCredit Bank in Bratislava. “We expect the budget deficit won’t fall next year.”
‘Reshaping’ Government
Slovak Finance Minister Jan Pociatek said he wants to “reshape” the government and cut spending to avoid raising income taxes as the government aims to bring the budget deficit below the EU limit by 2012. An earlier target date may create “a social disaster,” he said in an interview yesterday.
The ministry plans to trim the shortfall to 5.5 percent of GDP in 2010 from “slightly above” 6 percent of GDP this year, he said. The plan, which also calls for streamlining tax collection, envisages the gap at 4.2 percent of GDP in 2011.
Czech Finance Minister Eduard Janota has said he will propose a deficit as wide as 209 billion koruna in 2010, when the central bank expects the economy to grow 0.7 percent.
The interim Cabinet of Prime Minister Jan Fischer pledged to refrain from any overhaul of public spending as parties start campaigning before October parliamentary elections.
Face Pressure
In Romania and Hungary, governments face pressure to keep spending in check to meet the terms of bailout packages. Fellow EU bailout recipient Latvia had a 1.7 billion-euro ($2.4 billion) payment suspended on its 7.5 billion-euro loan until parliament committed to an austerity package.
Even so, the countries’ efforts to stick to fiscal stringency measures may pay off in the long run and encourage international investors to place their funds in emerging European assets. What’s more, the countries may emerge from the crisis stronger than when they entered it, economists said.
Cuts in Hungary and Romania “have exacerbated the recession, but, if sustained, would imply substantially reduced vulnerabilities going forward that should bolster investor sentiment and contribute to lower interest rates,” Radoslaw Bodys, an economist at Bank of America Corp.’s Merrill Lynch unit.