The Vienna Institute Monthly Report 1998/10
SUMMARIES

Bulgaria: Mixed signals about the state of the economy
There was no immediate fallout from the Russian crisis but its indirect negative impact may be quite strong. Overall the external conditions have not been favourable for Bulgaria in 1998 and the economic stalemate in the country has continued. After difficult negotiations the IMF agreed to finance a three-year reform programme which focuses on structural reforms and economic growth. However, the short-term economic prospects for Bulgaria remain dim. Despite the apparent macroeconomic stability, there are worrying signs of emerging imbalances which will need to be addressed by the authorities.
 

Czech Republic: Stagnation again
In the first half of 1998 the real GDP fell, year-on-year, by 1.7%. The whole year’s GDP is likely to show some decline as well. No matter what the exact final figures will be, the growth performance of the Czech economy is unsatisfactory. This fact increases the vulnerability of structurally weak corporations. Positive aspects of the Czech economy are a low deficit on the current account, a surplus in the government’s budget, remarkable stability of the nominal exchange rate and an at least temporary stand-still in the inflationary process. Resumption of growth could follow from lower interest rates and less fiscal austerity. In a situation of depressed demand, some budget deficit is not likely to boost inflation significantly. For the short and perhaps also medium term, Miloš Zeman’s minority government can be expected to survive in a stormy political climate.
 

Hungary: Healthy real economy, diving stock exchange prices
In the first half of 1998 and also in July the main trends of the Hungarian economy, characterized by steady economic growth, remained unchanged. In August and September the shock waves of the Russian crisis reached the Budapest Stock Exchange, leading to a considerable outflow of foreign portfolio investment. The stock exchange crash has had a limited impact on the real economy as yet, but the GDP forecast for the next year must be revised downwards.
 

Poland: Slowing down
Economic growth slowed down in the second quarter of 1998. The much-feared expansion of credit came to a halt. Gains in real wages and pensions were less pronounced than before. Private consumption rose 4.5% and gross fixed investment 14.6%. The inflation rate declined further. Despite strong real appreciation the deficits on foreign trade payments and on the current account did not worsen. The budget deficit was low. Official foreign reserves increased substantially – primarily due to high inflows of capital, including foreign direct investment.
 

Romania: Can the government contain the crisis?
Declining production together with increasing fiscal and current account deficits have brought Romania again into a crisis situation. Falling inflation and the relative stability of the exchange rate achieved in the first seven months of 1998 will probably vanish by the end of the year. In 1999 strict overall austerity will have to be maintained in view of growing foreign financing needs. Official debt service requirements will increase from USD 1.2 bn in 1998 to about 2 bn in 1999. Taking into account the increasing risk awareness of international financial markets, raising new credits will not be possible without the support of the IMF. Political will and administrative capacity have been too weak to implement IMF agreements in past years, but the economic policy intentions of the current government at least do not differ largely from IMF objectives. But if the domestic political strife continues and also the capacities of the IMF become uncertain, the Romanian crisis may aggravate.
 

Slovakia: High growth becoming more fragile
The strong growth of GDP in Slovakia (6.1% in the first half of 1998) is mostly driven by domestic demand, fuelled by ambitious public projects. Total public debt and its servicing has been increasing considerably, while the trade deficit and the current account deficit (11% of GDP) continue to be very high. As the National Bank of Slovakia (NBS) has been following a policy of high interest rates, the recent investment boom has been increasingly financed by foreign borrowing. Consequently, external debt is rising rapidly (to USD 11.3 bn) and already accounts for 56% of the GDP. Although the Russian financial crisis did not have any effect on Slovakia, the downward pressure on the Slovak koruna was getting stronger and stronger in the third quarter of the year; on 1 October the NBS abolished the fluctuation band of plus/minus 7%. The koruna is now freely floated and traded with wide spreads on the devaluation side.  On 25-26 September parliamentary elections were held in Slovakia. If a new government is formed quickly, the resulting devaluation against the previous mid-point of the fluctuation band would amount to up to 15% in the course of the next few weeks. A slowdown of economic growth, to 5% in 1998 and 3% in 1999, can be expected; due to the depreciation of the Slovak koruna the current account deficit may drop to some 9% of GDP in 1998 and to about 4% of GDP in 1999.
 

Russia: Economic policy options and outlook
The changes following the August rouble crash have not only destroyed the fragile monetary and exchange rate stability, but have created a wholly new political landscape in Russia. The 'liberal' approach to economic reforms, together with its proponents at home and abroad, has been discredited. One can now expect the most significant policy shift since the start of 'radical' reforms in 1992. A more interventionist, protectionist, expansionary, and in general 'conservative' approach to economic policies is likely, though there will be no return to a Soviet-type command economy. If the political struggle and the resulting power vacuum before the upcoming parliamentary and presidential elections do not continue and escalate, the present turmoil could settle down in a few months. Unlike its predecessors, the Primakov government has better chances to implement new policies if only because of its broader support in the Duma and regions. The economy will once more contract in 1998 (GDP will drop by at least 3%), but the situation could stabilize in the course of 1999, driven by a revival of spare industrial capacities and of investments. The planned modest increase in money supply does not necessarily have to lead to hyperinflation. Although the inflation will certainly jump, it will hopefully remain below 30% on annual average in 1998, and within a 60-80% range in 1999. The exchange rate might stabilize around RUB 15 per USD until the end of this year. The current account should deteriorate no further as imports will be curtailed as a result of devaluation and the introduction of some administrative restrictions.
 

Ukraine: Stunned by the Russian debacle
Already fragile, the Ukrainian economy is further reeling from shocks to its reputation, currency and export prospects that began with Russia's devaluation and partial default of mid-August 1998. Ukraine's gross reserves as of end-September stood at under half the 1997 average, but up on the month thanks to resumption of IMF and World Bank lending. The currency is already nearing the lower limit of the revised band announced in early September, and further debt restructuring remains probable. In mid-September Presidents Yeltsin and Kuchma held a meeting on respective financial, fiscal and parliament problems and the ongoing barriers to recorded trade.
 

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