Central Europe’s growth outlook is clouded by policy uncertainty. A controversial EUR 10 billion infrastructure project plan is causing a rift in Romania’s ruling coalition, prompting junior coalition partner USR-PLUS to consider triggering a no-confidence vote. After several failed attempts to form a government, Bulgaria is set for a third general election in 2021, which is set to take place on November 14. In the Czech Republic, the populist ANO has managed to regain its lost popularity in the polls but finding a potential coalition partner remains complicated. The ruling PiS party in Poland faces a major test in the aftermath of losing its majority in the Sejm, as the opposition moves to trigger a no-confidence vote against parliament speaker Elzbieta Witek.
While the CE region remains poised for a swift rebound on the back of solid macroeconomic fundamentals and strong recoveries in both domestic and external demand, the political situation remains uneasy, and policy uncertainty will continue to complicate the outlook. The success of the vote of no-confidence in Romania becomes more likely, which may derail earlier efforts to consolidate public finances and presents a threat to the outlook if a subsequent government returns to the previous ultra-loose fiscal policy. In Bulgaria, the return of GERB as a major political force in government is increasing, but the considerable delays in adopting a 2022 budgetary framework may result in a slower dispersion of EU funding and weigh on public investment growth. In Poland and the Czech Republic, populist policymaking is likely to translate into higher policy unpredictability, as both the PiS and ANO seek to maintain their grip on power.
The region will continue to offer an attractive investment opportunity, but MNCs should monitor political developments closely, as they will be indicative of the future direction of fiscal policy and policy uncertainty. While fiscal policy is likely to remain supportive of demand growth and may, in fact, see loosening as a result of ongoing events, executives should note that public finances in some markets, such as Romania, remain vulnerable, and failure to address these challenges presents a considerable risk to the outlook.
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