Credit Manager Magazine 3/2023

32 www.creditmanagermagazine.pl MARZEC / MARCH 2023 ANALYSIS Managing public debt in the CEE-11: challenges and opportunities amid higher borrowing costs Most CEE-11 sovereigns have considerably improved their public debt profiles during this last decade but resuming fiscal consolidation over the medium run will be crucial to containing rises in debt ratios amid higher funding costs and increased investment needs. The cost of borrowing has increased substan- tially across the 11 Central and Eastern Euro- pean EU Member States (CEE-11 - Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slova- kia, Slovenia) due to tighter domestic and global monetary conditions. Non-euro area CEE-11 countries have seen a near doubling of their 10-year local-currency sovereign bond yields since the beginning of 2022 (Fig- ure 1), as their central banks began raising rates before the ECB and the Federal Reserve to prevent additional exchange rate pass- throughs to higher inflation and mitigate currency pressure. The rise in borrowing costs has been more significant for countries with idiosyncratic pressure points, such as Hungary (down- graded by Scope Ratings on 24 February to BBB/Stable Outlook from BBB+/Negative), due to a temporary halt of its EU fund dis- bursements, and Romania (BBB-/Stable), due to large external-sector and budget deficits. Managing public debt under adverse econom- ic conditions poses challenges for CEE gov- ernments. They need to balance not over-re- lying on local-currency issuance against their still-sizeable foreign-currency debt and asso- ciated foreign-currency exposure. Over-issu- ing in local currencies raises domestic yields, affecting the health of domestic markets and crowding out the private sector in the short term. Foreign-currency risks, meanwhile, arise from a risk of prolonged pressure on local currencies from a deterioration in external balances amid still elevated and volatile en- ergy prices. Jakob Suwalski Director, Scope Ratings Levon Kameryan Associate Director, Scope Ratings Higher borrowing rates will gradually trigger more significant interest payments despite the relatively long maturities of CEE-11 sov- ereign debt portfolios. Slovenia (A/Stable) presents the region’s longest weighted aver- age maturity of debt, at 10 years, while Po- land (A+/Negative) has among the lowest at 4.9 years. The public debt profiles of most CEE-11 sovereigns are more resilient now to for- eign-currency risk because of developed domestic capital markets and a long phase of low yields in advanced economies, which pushed foreign investors to purchase the higher-yielding local-currency debt of re- gional debt markets – thereby driving local yields down. In 2011, about a half of Hun- garian debt and one third of Polish debt was denominated in foreign currency. However, by the end of 2022, only around a quarter of each was in foreign currency. Despite improved government debt profiles, local and foreign-currency borrowing costs will likely remain elevated in 2023, as central banks are expected to maintain tight mone- tary conditions to bridge high inflation. Fur- ther ECB tightening will keep the borrowing rates of euro area CEE sovereigns such as Slovakia (A+/Negative), Slovenia, Croatia (BBB+/Stable) and the Baltic states under pressure but such rates will remain mate- rially below funding rates of non-euro area CEE peers, benefiting from the euro’s global reserve currency status. Despite challenging financing conditions, CEE-11 governments will likely undertake limited fiscal adjustments in 2023 as budg- etary support for businesses and households continues amid slower economic growth. The weighted-average budget deficits of the CEE-11 are projected at 4.3% of GDP in 2023, after 4.4% last year. Source: Macrobond, national central banks and debt management offices, Scope Ratings.