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The new year was barely two weeks old when the rating agency Standard & Poor’s delivered a surprise debt downgrade of Poland, long seen as post-communist Europe’s most successful economy. The move reflected a view, the agency said, “that Poland’s system of institutional checks and balances has been eroded significantly”.
The country’s conservative Law and Justice government, it added, had “initiated various legislative measures that we consider weaken the independence and effectiveness of key institutions”.
For the previous five years, Hungary’s flirtation with “illiberal” democracy under prime minister Viktor Orban had been seen as something of an anomaly. But with Warsaw’s new government aping some of Hungary’s moves — seizing control of important institutions and stifling opposition media— it has begun to look like a trend.
Hungary and Poland are not alone in sparking concerns. In Slovakia, the Eurosceptic prime minister Robert Fico’s Smer party lost votes in elections in March but ended up forming a four-party coalition that includes the rightwing Slovak National party. A neo-Nazi group also entered parliament as the fifth-largest party.
Yves Lemay, managing director of Moody’s sovereign risk group, warned at a recent conference in Prague that “unorthodox policymaking” in Poland and Hungary and populism in Slovakia and Czech Republic had become “major risks” for investors.
“What would be important for us is the policy implications of these changes. Is there an element of political risk emerging in this region which could lead to some fiscal policy loosening, some retrenchment in structural reforms that have taken place over the years?” he asked. “It could affect the country’s prospects, fiscal policy, investor perceptions.”
Various types of risks are rising right across the 10 central and eastern European countries that joined the EU in 2004 and 2007, according to Otilia Dhand, a political risk analyst at Teneo Intelligence.
She says disillusionment that EU membership failed to deliver promised benefits, partly because the global financial crisis intervened, is leading to a “questioning of the mainstream politics and the rise of the fringes . . . almost across the board”.
“In the majority of the countries we see new parties coming up from the left or the right, mostly non-ideological, populist-type parties. Now that has its own risks . . . in inefficiency of decision-making and planning of policy direction.”
Total of the loans held by more than half a million Poles
That means investors in central and eastern European countries, even those in the EU, need to consider factors such as political stability and social cohesion in a way that might not have seemed necessary a few years ago.
But Ms Dhand says investors and analysts sometimes misread risks. In Hungary, for example, problems may lie less in the political dominance of Mr Orban and his Fidesz party per se, than in the underlying structure of crony capitalism that has emerged, where a group of politically well-connected businesspeople tend to be favoured.
Hungary has been seen by many foreign investors as one of the least business-friendly CEE countries since 2010. The Fidesz government imposed Europe’s highest banking levy on the largely foreign-owned sector and pursued a drive to increase Hungarian ownership of banking back above 50 per cent. It also made banks take losses on converting foreign-currency mortgages back to forints, even if that was designed to help borrowers struggling to repay the loans, and so boost the economy.
It also imposed “sectoral” taxes on retailers, telecoms and energy groups — all dominated by foreign companies.
Poland’s Law and Justice party has shadowed some of these steps, with a banking levy, though at a lower initial rate than Hungary’s, and a proposed retail tax. However the president, Andrzej Duda, has said he will rework a plan for forced conversion of Swiss franc mortgages after regulators warned it could provoke a banking crisis.
More than half a million Poles hold such loans, totalling $42bn. Most took them out pre-crisis to take advantage of lower Swiss interest rates but have been hit by the sharp appreciation in the Swiss franc.
Even in Hungary, however, there have been signs of softening in the past year, as the Budapest government realises it needs foreign banks and businesses to help sustain the growth it has promised voters.
Following talks between Andreas Treichl, chief executive of Austria’s Erste Group bank, and Mr Orban, on a “peace deal” between banks and the government, the European Bank for Reconstruction and Development signed a memorandum of understanding with Budapest in February 2016.
While Erste pledged to step up lending, and Hungary and the EBRD took stakes in Erste’s Hungarian arm to seal the deal, Budapest pledged progressively to reduce its bank levy.
Sir Suma Chakrabarti, the EBRD president, told the Financial Times this month the memorandum had been a “high-risk option [but] it looks like it’s paying off”.
“They did certain things with the banking sector and it was quite clear that we and others didn’t agree with those things,” Sir Suma said. “But now they’re moving in the right direction and that’s going to make it easier for the Hungarians to attract investment and have the banking sector play more of a positive role in the economy.”
Additional reporting by Henry Foy in Warsaw
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