The risk index has remained stable in Central and Eastern Europe with the ratings of Russia and Poland, the region’s main economies, remaining respectively in categories B and A4.

Growth accelerated late 2003 and remained relatively strong in the first quarter this year in Central European countries, still fuelled by robust domestic demand and competitiveness gains on exports. Economic activity should strengthen this year (up 4.1% expected after gaining 3.6% in 2003) due notably to increasing demand from West Europe. On the foreign exchange market meanwhile, the zloty and forint have regained some strength after depreciating sharply until last February.

In Poland (rated A4), the growth rate reached 4.7% year-on-year in the fourth quarter last year, bringing the full year result to 3.7%. Driven mainly by exports thus far, growth should reach about 4.3% this year, buoyed by a competitive zloty and strengthening foreign demand. Although the current account deficit should stay around 2% of GDP, financing needs will grow due to a sharp increase in amortisation of the debt. The main question marks concern investment, still constrained by uncertainties surrounding the European recovery and a lagging reform programme. The size of the public sector deficit (6.5% in 2003, 7.8% expected this year) has also remained a source of concern despite adoption by parliament of phase one of a fiscal reform programme. Finally, the announcement on 26 March of the Polish prime minister’s resignation, which followed the split in his party (the Social Democratic Alliance, with a minority in the Diet), should put an end to dissension in its ranks. However, it does not eliminate the prospect of early elections before the September 2005 schedule date.

In the Czech Republic (rated A2), the economy has been recovering at a moderate pace (up 2.9% in 2003), driven largely by private consumption, itself spurred by rising real wages. The strengthening of investment, already apparent late 2003, and foreign demand should contribute to bolstering growth this year (up 3.5% expected) despite initiation of an adjustment of public sector finances.
Concurrently, an acceleration of exports will permit reducing the current account deficit slightly. Although that deficit will nonetheless remain high at 5.8% of GDP, increasing foreign direct investment inflows should facilitate covering external financing needs.

Hungary (rated A2) is practically the only Central European country that suffered a growth slowdown in 2003 (up 2.9% after up 3.5% in 2002) attributable to a certain loss of export competitiveness and a reduction in public spending. However, that situation has caused no notable deterioration of company payment behaviour. The growth dynamic nonetheless improved during the year with investments and exports strengthening and GDP rising 3.5% in the last quarter. That augurs well for 2004 with growth expected to exceed 3%. Although declining markedly, the public sector deficit nonetheless reached 5.9% of GDP last year and external accounts deteriorated. That deterioration has generated increased external financing needs and covering them will depend mainly on increased debt due to the low level of foreign investment. Although capital volatility has spurred periodic tensions in the foreign exchange market, the forint has nonetheless strengthened lately due to improved economic fundamentals and economic policy management.

Further east, in Russia (rated B), the legislative elections of December 2003 and especially the presidential election in March this year have strengthened the position of Vladimir Putin, elected to a second four-year term with over 70% of the votes cast in the first round of voting. The country has continued to enjoy real political stability with its financial situation improving rapidly. Maintenance of current account surpluses for the fourth consecutive year and robust growth (7.3% in 2003) ? underpinned by robust domestic demand ? will constitute favourable elements in the macroeconomic framework. Official statistics reflect marked improvement in company payment behaviour in domestic trading. The stock of payment defaults in relation to GDP declined from 50% in 1998 to 14% in 2003.
Economic growth has nonetheless remained shaky with the economy increasingly dependent on raw material sectors, which tends to make the growth rate highly vulnerable to barrel-price fluctuations. The economy has benefited from exogenous factors (high oil prices and the strong euro), which may not be durable. The business climate has remained uncertain. The legal action against the Yukos Company and its management could deter foreign investment projects (FDI inflows have remained very limited) and reflects the continuing discord between clans. Implementation of reforms has remained problematical. Companies have resumed taking on heavy debt in international capital markets. Moreover, the banking system has remained very shaky due to the increasingly slow pace of reforms.