A safe corner of emerging markets looks less of a haven in 2020

An old bugbear is coming back to the European Union’s east.

In 2020, central banks from Warsaw to Bucharest will need to confront resurfacing price pressures from abroad, while seeking to avoid the kind of policy tightening that could choke fragile growth at home. That means renewed depreciation risks, with analysts predicting weakness in all regional currencies next year. Returns on local bonds will prove difficult to repeat, forecasts show.

“From a global perspective, the relatively low-yielding central and eastern European currencies should lag their emerging-market peers in 2020,” ING strategists including Petr Krpata said in an emailed note. “Growth is slowing, the euro-dollar pair is to stay range-bound, and both CEE currency valuation and carry are not attractive enough in dollar terms to get overly excited about.”

Next year promises a similar start to what many investors had anticipated for 2019, with policy makers closely watching inflation as tight labour markets lifted wages and consumption. But those fears were mostly alleviated by lower external price pressures, allowing policy makers to hold back on tightening.

Now, with the euro-area economy showing signs of recovery, the dilemma may return, especially if policy makers look to counter slowing economic growth in a region that’s become detached from global trends.

Here’s a list of the local risks to watch next year:

Poland

The central bank’s five-year run of rates on hold may come under scrutiny — and traders are pondering which direction policy makers could take. Above-target inflation would suggest tightening is in order, but loose financing conditions abroad and a slowing economy mean markets have started to price easing.

As the government heads for its fifth straight month without regular debt sales in December, bond investors will watch to see if Poland makes good on its pledge to have the country’s first-ever balanced budget, despite slowing growth.

As the zloty hovers unchanged against the euro this year, it may come under pressure in 2020, with investors fretting over the possible fallout from foreign-exchange borrowers’ mounting claims against banks.

Hungary

The trend is negative for Hungary’s forint ever since policy makers abandoned plans to tighten financing conditions in March. The currency has weakened to a record against the euro with analysts predicting more pain as the central bank maintains one of the lowest real interest rates in the world and the current-account balance turns to a deficit.

With no rate hikes in the pipeline, forint bonds may fare well, especially with the government’s continued focus on expanding a retail bond portfolio that involves only limited sales to institutional investors. Prime Minister Viktor Orban will also be in the spotlight after suffering his first setback in a decade at municipal elections.

Czech Republic

The koruna has been stuck this year between a market that’s overloaded with foreign investors trying to sell their holdings, and a central bank that’s keeping potential policy tightening on the agenda.

Inflation has trended above target, but the economy is slowing, creating a dilemma for a monetary council that’s developed a reputation as one of the continent’s most ardent inflation hawks.

Meanwhile, protests may continue against Prime Minister Andrej Babis over an alleged conflict of interest. Bond issuance will remain elevated to help cover social-spending increases and repay maturing debt.

Romania

Widening twin deficits are pressuring Romania’s currency and bonds as a minority liberal government, which took power in November, tries to rein in populist spending in a busy election year.

Volatile politics has made the leu, which is tightly managed by the central bank, the region’s worst performer in 2019.

And the currency could come under additional fire next year if the government fails to lower a budget deficit that’s close to the 3% of gross domestic product allowed by the European Union. S&P cited the budget as one concern that may trigger a downgrade to junk after it lowered the outlook on the nation’s rating.

Serbia

Serbia may be on its way to becoming an investment-grade credit as early as 2020, if the government can keep control of the fiscal deficit and stops short of excessive public wage and pension increases in an election year.

Both the dinar and government bonds may get further support if the country meets the requirements for inclusion in Euroclear’s international debt settlement systems. Anticipation that the nation’s bonds will be included in emerging-market indexes has helped spur inflows, prompting central bank intervention and rate cuts to stem appreciation pressures.

Still, protracted negotiations on European Union membership may weigh on investor appetite in a region that’s still riven with political differences.

© 2019 Bloomberg L.P.