Weekly Economic Briefings > Emerging Markets Weekly Economic Briefing

The usually 'quiet' Central and East European (CEE) economies have stolen the show among emerging markets recently, seeing their currencies perform strongly amidst a major EM sell-off. Looking closely at their risk profile, we find that this perception is largely justified, but would warn against generalisation. CEE economies are not immune to global challenges, facing still high external debt burdens and idiosyncratic risks of their own, such as the vulnerability to the Volkswagen emissions scandal. To analyse the risk profile of four CEE economies (the Czech Republic, Hungary, Poland and Romania) we apply a framework in which exposure to shocks is determined by 'push' (global economic and financial conditions, such as monetary policy normalisation or a China-driven slowdown) and 'pull' factors (country-specific prospects, vulnerabilities and policies). To analyse the latter, we develop a detailed risk ranking of 19 emerging economies, which looks at their ability to withstand external shocks and the policy tools they have to respond to them. The results show that the CEE-4 are indeed most favourably placed to deal with the current global challenges, being net oil importers, more exposed to strengthening Eurozone demand than to slowdowns in China and EMs, and more sensitive to Eurozone monetary policy than to US rate normalisation. These economies are also relatively better positioned to withstand and respond to possible external shocks: strong current account balances and low inflation, along with significant corrections of fiscal balances and external debt burdens since 2010, would limit capital outflows and imply better asset performance. However, still high external debt burdens are a downside risk that could materialise in the event of a meaningful external shock. The other, rather more idiosyncratic risk facing the region is the fallout from the Volkswagen scandal. But despite CEE economies' heavy reliance on the automotive sector, it looks unlikely to derail the recovery. Using the OE Global Economic Model, we estimate the impact of a moderately adverse scenario in which automotive exports fall by 10% in 2016, and find that the resulting loss of output would not exceed 1 percentage point in the first year, followed by a gradual catching-up to previous levels by 2018.