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Eastern Europe’s markets rally but economies still plagued by deep troubles
By Vanessa Gera, THE ASSOCIATED PRESS
Wednesday, February 3, 2010

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WARSAW, Poland - Stocks and currencies have surged in central and eastern Europe over recent months, outpacing their richer neighbours to the west - growth that has come on the heels of international rescue loans and stringent efforts at lowering public deficits.

But economists are warning that the stronger stock markets don’t yet reflect a healing of the real economies, many of which remain plagued by slow growth and anemic consumer demand despite emerging from recession and, in some cases, financial crises.

A new worry has been tossed into the mix: fears that the budget crisis in Greece, which has shaken the European Union and the 16-nation euro zone, could infect parts of the region - crucially, neighbour and trade partner Bulgaria, where Greek banks are a common sight.

Regional markets have risen so fast in part because they had fallen so far early in 2009 at the nadir of the global meltdown and, as the worst of the crisis passed, were seen as oversold.

"Although the markets have rallied strongly over the past six to nine months, that follows an absolute collapse in the three to six months prior to that," said Neil Shearing, emerging Europe economist at Capital Economics in London.

"The rally has been driven in part by the worst being averted after being on the brink last spring - not just in the region but in the global economy," he added.

Since late June, stocks in the region have risen 39 per cent compared to 24 per cent in emerging markets as a whole and 17 per cent in the developed world, according to FTSE indices.

The Prague Stock Exchange, for instance, hit bottom on March 3, 2009, with the benchmark PX Index plunging to a final close of 631, but was up 88 per cent to 1,184 on Wednesday.

And Poland - despite being the only European country to avoid recession - also saw its markets collapse when investors lost confidence in the entire region. Warsaw’s WIG-20 index is now trading 65 per cent higher than its low in February 2009. The fate of the currency, the zloty, also mirrored the stock markets, falling sharply against the dollar and euro but regaining much of its previous strength. Last February, for example, it took 4.64 zlotys to buy a euro but Wednesday only 3.98.

International Monetary Fund bailouts for Ukraine, Hungary, Romania and Latvia helped restore confidence, too. Many countries also enjoy lower government debt than some Western counterparts - especially after stricter fiscal policies implemented after the crisis.

Hungary, whose currency, the forint, has been strengthening over the past year as the government raised taxes, closed hospitals and reduced pensions to turn a once-bloated deficit into one of the lowest in the EU, dropping from a height of above 10 per cent of GDP to a more manageable 3.8 per cent.

Even so, its economy is expected to contract another 0.3 per cent this year, but the pace is better than the 6.7 per cent decline it registered in 2009.

In Latvia, where economic activity shrank by approximately 18 per cent last year, GDP is expected to fall another 4 per cent this year, and stocks were flat in 2009.

"The recovery in central and eastern Europe is very weak and very fragile," Christensen warned.

In Bulgaria, worries are mounting that troubles across the border in Greece could hurt them and they hope the EU will limit the crisis. Many Greek banks and companies have subsidiaries in Bulgaria.

"Greece is one of the main investors in Bulgaria and the financial crisis there will affect our economy," said Stamen Tassev, executive director of the Bulgarian Business Leaders Forum. "Bilateral trade is important for Bulgaria and a possible drop in orders from Greece could seriously harm our producers."

Already Bulgarian companies estimate that they have lost over C300 million because of a blockade at the border by protesting Greek farmers who are demanding a quicker payment of state aid.

In Russia, the ruble-denominated benchmark MICEX has added 35 per cent since Aug. 1, to reach 1,453 points on Wednesday - but is still a long way from the all-time high of 1,969.9 points. Russia was the world’s second-best performing market, next to Brazil, in 2009, according to Moscow-based Renaissance Capital.

Apart from strong oil prices, Russian stocks have been helped by macroeconomic figures that show the country of 142 million people is weathering the downturn slightly better than thought and its budget deficit is expected to be far less than originally expected. Risks remain if oil prices fall, however.

In the three Baltic states, which had the EU’s worst economies in 2009, markets are minuscule. Still, stocks in Estonia and Lithuania posted large gains over the last year after precipitous, almost calamitous losses in 2007 and 2008.

Shearing said that in contrast to other emerging markets, those in central and eastern Europe will struggle to create domestically driven growth, bank credit will remain tight, labour markets are likely to deteriorate further and fiscal policy will tighten.

As a result, the region will be dependent on a global recovery, which is likely to be slow, for its own return to healthy growth.

"It’s too soon to say we are out of the woods," Shearing said.

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