Rule of law continues to be a topic in CEE

On the radar

• Inflation in Czechia eased to 7.3% y/y in November.

• Industry grew 4.3% y/y in October in Slovakia, while in Slovenia it expanded by 0.4% y/y.

• Today, November’s inflation in Serbia will be published.

Economic developments

In the wake of Slovakia's recent credit rating downgrade by Fitch, we examine another crucial aspect of credit ratings beyond the fiscal situation: the political landscape. The political dynamics in CEE countries significantly influence their relationships with the EU, as evidenced by the strained relations experienced by Poland and Hungary in recent years. As Poland prepares to inaugurate its new government today, we anticipate an enhancement in its EU relations and the subsequent release of the RRP funding. Conversely, Slovakia's newly elected government is already on a collision course with European institutions due to a proposed law that seeks to dissolve the Special Prosecutor's Office from January onwards. Reliable metrics for this matter are the World Bank's Worldwide Governance Indicators (WGIs), which evaluate the robustness of institutions across numerous countries. We chose the two most relevant indicators for the CEE region: Control of Corruption and Rule of Law. In 2022, Czechia and Slovenia emerged as regional leaders, while Hungary's corruption control was merely around the global median. When examining the Rule of Law, Croatia surprisingly received the lowest rating, a situation we foresee changing in the coming year. We predict an improvement in Poland's position as well, whereas Slovakia is likely to experience further decline, continuing the trend since 2020.

Market developments

While the Czech koruna and the Hungarian forint started the week slightly weaker against the euro, the Polish Zloty appreciated. On Tuesday, the government of former PM Morawiecki (who was designated by the President to form a new government) failed to get a confidence vote. Thus, the Parliament chose Donald Tusk to be the new Prime Minister and form the new government. The bond market showed a mixed performance from the beginning of the week. In Romania, Prime Minister Ciolacu said that the 2024 budget deficit will be planned so that it does not exceed 5% of GDP. Slovakia plans to reduce the 2024 budget gap by 0.5 percentage points so that the general government balance is close to -6% of GDP.

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