The CEE Response To COVID-19

Central Europe has acted swiftly against the coronavirus spread. Czech Republic, Hungary, Poland, and Romania have all closed their borders to non-residents, and domestic movements are severely restricted also. All four central banks have loosened policy, with Poland and Romania also announcing a move to QE. The National Bank of Hungary is the only one not to cut rates but announced other liquidity measures. On the fiscal side, support is modest compared with some of the major economies, but we expect more could well be announced.

 

Poland

– Social distancing measures remain in place, likely to be extended.

– Government monetary authorities announce measures to help the economy.

The Law and Justice (PiS)-led government has continued a broad lockdown of Polish society, with a state of epidemic emergency effected on 15 March and likely to be extended. This bans large gatherings, closes bars, restaurants and places of entertainment, and keep schools closed. Poland’s case count was relatively low at 325 as of midday on 19 March but has since risen to over 1000 and the health authorities suggest the lockdown will be needed for at least 2-3 weeks.

Monetary policy: The National Bank of Poland (NBP) announced the start of repo operations on 16 March to boost liquidity for banks, Polish QE in the form of the purchase of Treasury bonds on secondary markets, and TLTRO-type operations via the introduction of discount credit bills to allow the refinancing of loans granted by banks to non-financial sector enterprises. The Monetary Policy Council slashed the benchmark rate a day later to 1.00% from 1.50%, cut the reserve requirement ratio to 0.5% from 3.5%, and raised the reserve rate to 1.5% from 0.5%.

Fiscal: The government’s turn came on Wednesday when it announced a PLN 212bn package to help protect jobs, companies, and the economy at large. The total is around 10% of GDP and will go some way to addressing problems. However, companies have been disappointed, saying it doesn’t go far enough. Direct budget financing seems lower at around PLN 60bn-70bn, or some 3% of GDP.

Other measures: The government will likely extend the extreme social distancing measures for several more weeks to ensure health services can handle the load and to ‘flatten the curve’.

 

Hungary

– All borders closed for non-residents; country enters state of emergency.

– Cabinet imposes moratorium on loan service payments and tax relief for most affected sectors in first stage.

– Liquidity measures from the NBH, but no rate cut.

The Hungarian government announced that the coronavirus has already progressed from the phase of individual cases to group infections and has signalled an expectation of further growth as well. At the same time, the government stated that it has completed the preparations for fighting the healthcare impact of the coronavirus and now shifts to measures that support the economy and save jobs. At present, Hungary has closed its borders for all non-residents and is allowing only returning residents and freight traffic, in line with the recent EU-level agreement. Domestic restrictions include limits on opening hours for restaurants and shops, with the exception of food stores, drugstores and pharmacies, as well as bans on indoor and outdoor events and the closure of educational facilities at all levels.

The country declared a state of emergency on 11 March. As such, army command has sent military troops to 140 Hungarian companies in various sectors, which are identified as vital for the country’s security in the current situation.

Monetary policy: The National Bank of Hungary (NBH) acted first to support the economy. It loosened liquidity conditions through its regular weekly forint swap tender and also announced a new forint swap tender with one-week maturity to be held every day. Subsequently, it underlined its commitment to support banks with liquidity during the economic recovery process. In addition, the NBH also loosened collateral requirements for banks, effectively raising available collateral by HUF 2,500bn in order to support banks’ lending capacity. NBH indicated plans to devise new programmes for boosting lending and a new mortgage bond-buying programme. At the NBH initiative, the government implemented a moratorium on the payment of all due loan service obligations for all retail and corporate borrowers until the end of 2020.

Fiscal: The government’s fiscal response has been limited to the most severely affected sectors so far: hospitality, entertainment and sports, and passenger transport. The government waived a number of tax obligations for these sectors until end-June and froze all rental contracts for them also. It promised additional measures to support the economy in the future.

 

Czech Republic

– State of emergency declared; country put under quarantine.

– Borders shut except for essential traffic; only citizens and permanent residents let in.

– First fiscal measures announced, more in the pipeline.

– Czech National Bank (CNB) cuts rates.

The government declared a state of emergency and quarantined the entire country the past week. Freedom of movement has been severely limited, and people are now required to cover their face when going outside. The government has also shut down borders for non-essential traffic (i.e. everything but cargo and medical supplies) and is allowing only citizens and permanent residents into the country. Exports of medical supplies have been prohibited and the government is trying to procure protective equipment from abroad (Ukraine and China for now).

Monetary policy: The CNB cut the policy rate by 50bps to 1.75% on 16 March and committed to keep doing cuts until necessary. Some banks agreed to grant certain clients postponement loan repayment, though the initiative remains voluntary and not all banks have joined. The CNB cut rates by a further 75bps on 26 March, compared with expectations for a 50bps cut, and announced further measures to support the economy.

Fiscal: The government announced its first fiscal measures last week, committing CZK 100bn direct state aid and CZK 900bn in state guarantees. It also expanded a credit line to be granted from the state development bank (CMRZB) to CZK 11.4bn. The government received EUR 1.16bn from the EU budget to mitigate the outbreak impact, and part of that sum will be redirected to the credit line. This year’s budget has now been revised with the deficit expected at an all-time high of CZK 200bn versus the earlier CZK 40bn. The growth assumption was cut from +2.2% to -5.1%, although the actual outcome remains highly uncertain. The government also announced it would directly cover wages to help avoid layoffs and plans to provide direct payments for the self-employed as well as a temporary relief in healthcare and social security payments.

 

Romania

– Stricter measures implemented after situation in Italy escalates and numerous Romanians working there return home.

– Economic measures aim at securing working capital, financing for investment, and jobs.

– National Bank of Romania (NBR) cuts rates.

Romania entered a state of emergency as of 16 March, allowing the government to implement extraordinary measures to fight the virus. The first patient infected with COVID-19 was confirmed on 26 February, and the number of infected has been constantly rising since. The situation remained under control, however.

Nevertheless, after the epidemic in Italy dramatically worsened, the Romanian authorities started to implement harsher measures to prevent an aggressive spread domestically, fearing the return of potentially infected nationals from Italy. Schools are closed, several border points are shut down and public transport to and from Italy and Spain are suspended. The population appears disciplined regarding social distancing, but there still are individuals breaching quarantine or home isolation rules, which is enough to start community spreading. Hospitals are preparing for a severe outbreak, but doctors say medical equipment is still inadequate.

Monetary policy: The NBR cut rates by 50bps to 2% on 20 March and narrowed the corridor on o/n borrowing and lending facilities to +/-0.5pp from +/-1pp previously to ensure ROBOR rates decline sufficiently. NBR also announced QE through planned purchases of RON-denominated bonds on the secondary market and committed to reducing reserve requirements on both local and FX-denominated liabilities if needed. The bank also said it was suspending its published MPC calendar and the NBR Board would meet whenever necessary.

Fiscal: The government approved a package of measures to help local firms deal with the situation. Most aim to secure firms’ working capital, finance for investment, and protect jobs. Finance Minister Florin Citu said that the allotments in the package amount to about 1-2% of projected GDP for this year, and companies seem to be generally satisfied with some measures.

CEEMarketWatch produces macroeconomic and political research for over 60 countries in EMs and the eurozone periphery. The research is conducted by a team of local economists.

 

 

 

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)