Continuation of monetary easing gets more support
CEE Bond Market Report , 9. Apr.
The negative impact of the recently announced US tariffs on CEE economies certainly outweighs the positive spillover from the German fiscal stimulus, even if the tariffs are halved by year-end, which is our baseline scenario. Lower growth should support the revival of monetary easing and bond markets. At this moment, we see the largest potential for rate cuts in Poland, which has been delaying the normalization of monetary policy for a long time. We still see room for further decline of government bond yields in CEE, although tiny, as we assume tariffs to be halved by year-end.
According to preliminary information, Poland recorded a much wider fiscal deficit in 2024 (6.6% of GDP) compared to our forecast (5.8%), while Slovenia surprised with a better than expected deficit in 2024 (0.9% of GDP) and the lowest deficit in the last five years. Romania’s second consolidation package has been delayed due to political turmoil, putting the 7% target in 2025 at high risk. We believe a rating downgrade of Romania is unlikely by fall 2025 and can be avoided if the government introduces a fiscal adjustment plan, which is expected after the rerun of the presidential elections scheduled for May 4-18. Hungary eased its fiscal target for 2026 from the previous 2.9% to 3.5% of GDP due to pre-election spending.
Majority of CEE countries are committed to higher defense spending. The EC is preparing a new financing facility similar to RRF, which will provide ReArm loans at favorable conditions to member countries for financing of defense spending. When it comes to non-debt funding, the EC is considering that part of cohesion funds could also be used for financing of defense spending in the future.
CEE countries started the year with far lower foreign issuance compared to 1Q24, especially when it comes to USD issues. YTD bond issuance in USD for the region was less than half compared to a year ago (USD 6.8bn vs. USD 14.5bn). While Slovakia launched its first retail bond issue and Slovenia the second ever in 1Q25, demand for retail bonds in Croatia and Hungary, two countries with the highest stock of retail bonds, has been fading or saturated. The Hungarian debt agency altered its issuance plan for this year, reacting to higher demand for 5Y and 10Y papers. The Ministry of Economy plans to boost demand via regulatory minimum holding of government securities in investment funds for liquidity purposes.
According to preliminary information, Poland recorded a much wider fiscal deficit in 2024 (6.6% of GDP) compared to our forecast (5.8%), while Slovenia surprised with a better than expected deficit in 2024 (0.9% of GDP) and the lowest deficit in the last five years. Romania’s second consolidation package has been delayed due to political turmoil, putting the 7% target in 2025 at high risk. We believe a rating downgrade of Romania is unlikely by fall 2025 and can be avoided if the government introduces a fiscal adjustment plan, which is expected after the rerun of the presidential elections scheduled for May 4-18. Hungary eased its fiscal target for 2026 from the previous 2.9% to 3.5% of GDP due to pre-election spending.
Majority of CEE countries are committed to higher defense spending. The EC is preparing a new financing facility similar to RRF, which will provide ReArm loans at favorable conditions to member countries for financing of defense spending. When it comes to non-debt funding, the EC is considering that part of cohesion funds could also be used for financing of defense spending in the future.
CEE countries started the year with far lower foreign issuance compared to 1Q24, especially when it comes to USD issues. YTD bond issuance in USD for the region was less than half compared to a year ago (USD 6.8bn vs. USD 14.5bn). While Slovakia launched its first retail bond issue and Slovenia the second ever in 1Q25, demand for retail bonds in Croatia and Hungary, two countries with the highest stock of retail bonds, has been fading or saturated. The Hungarian debt agency altered its issuance plan for this year, reacting to higher demand for 5Y and 10Y papers. The Ministry of Economy plans to boost demand via regulatory minimum holding of government securities in investment funds for liquidity purposes.