Insight

Ukraine in 2021: back to the old-new normal

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IMF , Political Stability , Ukraine

2021 will see Ukraine return to a variation on the pre-2019 norm: balancing between reform and vested interests. Persistent financing difficulties should produce enough pressure to see at least some reform progress. One year ago, Ukraine seemed ready to embark on a path of sustainable growth, demolishing the oligarchic structures that have throttled the country’s development since independence. But the reform drive has dissipated. Oligarchic power struggles crept back, forcing the sacking of a technocratic government in March and the leadership of the National Bank of Ukraine (NBU) in July, and in October, the Constitutional Court derailed much of the

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Despite familiar risks, Romania has a shot at unprecedented stability

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elections , Political Stability , Romania

A potent centre-right coalition, if kept together, could usher in a new era of political and economic stability in Romania. This path is dotted with familiar risks, however. Romania is at a historic crossroads with tremendous opportunities. With the president, the PNL-led government, and many municipalities hailing from the same political camp, the interests of the executive and legislative branches seem to be aligned at last. While slim, the coalition’s majority in parliament should suffice for it to introduce much-needed reforms and a comprehensive fiscal consolidation strategy to set the country on a long-term growth path.  While there are grounds

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Hungary and Poland are bluffing

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EU funding , Hungary , Poland , Rule of Law

Threatening to veto the EU budget over a mechanism that will tie funding to respect for the rule of law, Hungary and Poland are seeking a concession, not to commit collective self-harm. The EU budget package remains likely to be adopted before the end of the year. Pressure is mounting on Hungary and Poland from Germany – and, in Poland’s case, from the country’s governing coalition itself. In EU compromises, no-one ever loses face. Poland and Hungary are likely to be saved from this by a minor concession on the rule of law mechanism. This could be an annex to

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European funds are likely to be withheld from Poland and Hungary in the next seven-year EU budget amid rule of law (RoL) concerns

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EU funding , Hungary , Poland , Rule of Law

All three major EU institutions are adamant that EU financial support should be tied to respecting common European values and the rule of law. Poland and Hungary will likely lose some funding, with the exact amount depending on the hawkishness of a new rule of law mechanism. Although the precise system of RoL criteria along with details concerning the governance of the mechanism are yet to be determined, pro-RoL stakeholders will likely overcome opposition by Hungary and Poland. Growing pressure from both domestic audiences and the European Parliament (which threatened to block the MFF, the EU’s seven-year budget if no

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A rupture with Governor Matolcsy triggered Marton Nagy’s ousting from the National Bank

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Hungary , monetary policy , National Bank of Hungary

Disagreements with Governor Matolcsy over policy led to the dismissal of Marton Nagy as Deputy Governor of the National Bank of Hungary (NBH). Nagy’s appointment as advisor to PM Orban is likely a bridge to a more meaningful position. Nagy’s relationship with Matolcsy – as well as others at NBH – had long been fraught with tension. He forged a good personal relationship with Finance Minister Mihaly Varga, whose relationship with Matolcsy is strained, further offending Matolcsy when exhibiting ambition to take over the Governor’s position once his mandate expired. Their personal relationship became untenable when in March Nagy secured

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Hungarian forint exchange rate set to remain low

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currency , exchange rate , Hungary , monetary policy

The coronavirus crisis has pushed the forint to levels over Ft350:€1. This corresponds to the government’s preferences, and the central bank will do just enough to keep it from falling any further. The early effects of the coronavirus pandemic in Hungary drove the country’s currency to a record low, Ft370:€1, on 18 March. The National Bank of Hungary (NBH, the central bank) responded by hiking the one-week lending rate to 1.85%, from 0.9% previously. It left its 0.9% policy rate unchanged, however. This has so far succeeded in keeping the forint at levels between Ft350 and Ft360 to the euro.

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Sovereign credit risk soars in Ukraine

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Credit Risk , Sovereign Debt , Ukraine

The country is likely to avoid a default on existing obligations, but only if it keeps the IMF on board through continued commitment to reform. After a long recovery from the crisis of 2014-15, Ukraine’s macroeconomic stability has taken another large blow. Fiscal rollout in response to the coronavirus crisis, as well as a contraction in GDP that could come to anything between 5 and 10% in 2020, mean that the budget deficit will rise to at least 7% this year. This will be financed through borrowing, but a sharp rise in bond yields earlier this year means that doing

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Montenegro attracts significant Chinese investment

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Credit Risk , Sovereign Debt , Ukraine

Perks offered to China in return for investing in an ambitious highway project demonstrate the concessions Montenegro is willing to make to secure investment. The coronavirus crisis has heaped risks on the credit used to finance it, however. In recent years the Balkans have seen a massive increase in interest from China, under the umbrella of the worldwide Belt and Road Initiative. One of the region’s biggest examples of Chinese involvement is the ongoing project to build a highway from Bar, a port on Montenegro’s Adriatic coast, to Serbia’s capital city, Belgrade. Montenegro has attracted China to the project by

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Regional giants benefit from banking sector consolidation in Serbia and Montenegro

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banking sector , Montenegro , Serbia

Hungarian OTP and Slovenian NLB strengthen their position in both Serbia and Montenegro as the banking sector continues to consolidate in both countries, raising barriers to entry for new players The banking sectors of Serbia and Montenegro are both undergoing major changes. There is a clear trend of consolidation, largely to the benefit of two major entities: Hungary’s OTP Group (OTP) and Slovenia’s Nova Ljubljanska Banka (NLB), which is owned by the US-based Bank of New York Mellon. In February Serbia saw a landmark privatization, with the state selling major bank Komercijalna Banka Beograd (KBB) to NLB. It is likely

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Kazakhstan’s Transition under President Kassym-Jomart Tokayev

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Kazakhstan , Political Stability , Succession

Despite new president Kassym-Jomart Tokayev’s lip service to reform, continuity in Kazakhstan is almost certain. The country’s geopolitical orientation and economic model will remain unchanged even as former president Nursultan Nazarbayev gradually steps back from public life. In our latest macro brief, we examine developments in Kazakhstan, where Kassym-Jomart Tokayev has succeeded Nursultan Nazarbayev as president. We conclude that, despite lip service to reform, Tokayev will stay on the path set by his predecessor, as Nazarbayev retains decisive power. Kazakhstan’s geopolitical alignment and economic orientation are not expected to change in the medium term. In the longer term, we predict

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