The countries of Eastern Europe bordering Ukraine are forced to build up public debts at a record pace. They incur increased costs due to the influx of Ukrainian refugees, and also compensate their own citizens for losses due to a sharp increase in energy prices, which was largely provoked by Russia's actions on the world market. Since the beginning of the year, Ukraine's neighbors have already borrowed $32 billion on global markets, with Bloomberg noting that these countries have never borrowed money at such a pace before.
Moreover, for the first time in the last ten years, Poland, Hungary and Romania were in the top 5 countries in terms of borrowing volumes among all developing countries of the world. The leader of this rating is Saudi Arabia, which has occupied $10 billion in world markets since the beginning of the year, Poland is second ($8.8 billion), Turkey is third ($7.5 billion), Romania is fourth ($6.2 billion) , Hungary closes the top five with a raised public debt of $4.7 billion. At the same time, two more European countries were in the top ten: Slovakia ($3.7 billion) and Slovenia ($3.1 billion).
The agency notes that the time for increasing the public debt was not chosen very well: high inflation forced the Central Banks to raise rates, which made money expensive. Now even the leaders of Eastern Europe with good ratings are forced to borrow at a fairly high percentage. For example, 30-year bonds of Poland were issued at 5.5% per annum – a year ago, papers of the same period were issued with a yield of 4% per annum. The increase in the tax burden, as the agency notes, in the future will lead to an increase in the burden on the budget and may increase its deficit.
Moreover, investors are already heavily burdened with the volumes with which the economies of Eastern European countries enter the market. This affects the yield on securities: Polish bonds are already trading at about the same level of risk and return as the bonds of the Philippines, Indonesia or Uruguay. Investors fear that economic problems will persist in these countries for a long time, as no one can predict the exact end of the war in Ukraine.
“Unfortunately, the situation is very much dependent on things that are difficult to predict, such as developments on the ground in Ukraine, which means deterioration in financing conditions,” said Sergey Dergachev, head of emerging markets corporate debt at Union Investment Privatfonds.
Meanwhile, the deficit of local budgets is already acquiring the scale of a serious problem. According to agency estimates, the total budget deficit of the countries of Eastern Europe in 2023 will grow from 1.3% of total GDP to 4.3% – by 3.3 times. Daniel Wood, fixed income portfolio manager at William Blair International, notes that such figures could lead to a decrease in economic growth, while the authorities of the countries have not yet solved the problems, since a significant part of the costs are subsidies for refugees and households.
The buildup of public debt in foreign currency for Poland, Hungary and Romania – countries that have national currencies (zloty, forint and lei) – in the current environment creates additional risks. National currencies are much more volatile and can fall much more against the dollar and the euro, while the main factors of economic instability – war and high inflation – are still relevant.
However, representatives of national governments do not agree with the increase in risks. The head of the Hungarian public debt management agency, Zoltan Kurali, said that diversifying borrowers is useful, and borrowing such volumes in the domestic market would be even more expensive. The Polish Ministry of Finance said that it does not see high risks, given the stability of the economy and its importance for the region. Moreover, the agency is confident that the zloty will strengthen against the US dollar, which will make servicing the public debt in US currency even more profitable. Representatives of Romania did not comment on the increase in public debt in foreign currency.
Despite the remaining fiscal risks, experts do not expect that the governments of the countries will continue to increase public debt at a similar pace during the year. For example, Hungary will probably no longer have to enter the global public debt market this year. Another not very large placement is expected from Poland, depending on the level of spending in the pre-election year. But in Romania, experts predict a further increase in public debt, although they note that so far all these decisions fit into the budget logic and do not carry increased risks.