News October 10th, 2011

Eng. Paul Keisch Page 1

Resistance to turbulence of Central and

Eastern Europe countries has improved

Capital and currencies of Central and Eastern Europe have been

decreasing in recent weeks, amid fears of the crisis in the euro area,

but nobody provides for these countries a return to recession,

reports the Financial Times in Thursday's edition.

In recent years, ties between CEE with the west of the continent have been both a source of strength

and a weakness for the first. For much of the past decade, foreign investment flooded the region,

stimulating economic growth, but creating both imbalances and swelling asset bubbles.

When credit flows have dried up after Lehman Brothers collapse in 2008, the region was among the

most affected in the world - although there were notable exceptions such as Poland, which has

avoided recession. Subsequently, Poland, Czech Republic, Slovakia and Hungary have returned

stronger than much of the rest of the continent, driven by their power of production, but also the

contact with the German export machine, which investments in the last decade have created.

Currently, however, as economic outlook darkens again developed markets, Central Europe again

felt fear. Region capital and currencies declined in recent weeks amid the crisis of euro zone and

some economies in the region have experienced the worst quarter from the last three months of

2008. In this context, the International Monetary Fund last month joined other bodies that have

reduced forecasts for economic growth this year and next year for much of the region. Despite this,

none of forecasts is talking about a return to recession. Whilst towards the south-east, in the

Balkans, the outlook looks worse, as the countries of Central Europe and Baltic States there is

reason to believe that they are less vulnerable and better equipped to deal with the problems than

many countries in the euro zone. Poland, the largest domestic market in the region, demonstrates

once again a special resistance to turbulence.

Public debt dynamics in CEE countries is generally better than in Western countries. For example,

although Hungary's debt is 77% of GDP which is high for the region, compared with many countries

in the euro area, it is lower and falling. Sam Vecht, manager of BlackRock's Eastern European Trust

investment fund, noted that rating agencies have upgraded the credit ratings of European

"emerging" states in recent months, including Latvia, Serbia, Hungary, Romania and the Czech

Republic. In contrast, in Western Europe, ratings were lowered for Greece, Spain, Portugal and

Ireland. Although Slovakia, Slovenia and Estonia are in the euro area, many other countries in the

region still have currency with free floating and up to 10% depreciation against the euro in recent

weeks has increased competitiveness. However, once the current crisis passes, growth prospects for

the next 10 years look different from years of rapid growth before 2008.

This is partly due to the fact that countries central European are already "hybrid" economies

somewhere between developed and emerging markets, explains Marcin Hejka, regional managing

director for Intel Capital. In medium term, growth in these countries is expected to exceed that of

Western Europe, partly due to the ongoing process of Western Europe countries 'catching up'.