Just
a week ago, before deadly floods swept through central Europe, the Czech
Republic looked on track to become the first country in the region since
COVID-19 to pull its budget deficit firmly below the 3% of GDP cap set by
European Union rules.
Now
that small victory for public finances hangs in the balance as the Czech
Republic and Poland, which have borne the brunt of the deluge, count the cost
of the worst floods to hit the region in at least two decades.
Based
on estimates from local officials, the damage to infrastructure could reach a
combined $10 billion in these two countries alone. Poland's finance minister
said the $5.6 billion allotted from EU funds would cover some, but not all of
the costs to recover from the floods.
Economic
losses linked to extreme weather are adding to strains on state finances in a
region still squeezed by the aftermath of the COVID-19 pandemic and the
inflation surge following Russia's 2022 invasion of neighbouring Ukraine.
Since
the pandemic when EU member states set aside the bloc's stipulation that they
keep annual deficits to 3% of gross domestic product, budget shortfalls in the
region ballooned to as much as 9% of GDP in Romania and 7% in Poland and
Hungary.
Inflation
and elections in Poland, Hungary and Romania – with the inevitable promises of
largesse - further hampered deficit cuts.
Higher
military investment, inflation-linked spending on pensions and increased debt
servicing costs are also stretching budgets.
On
Thursday, the Czech finance ministry said it would allocate 30 billion crowns
($1.3 billion), or 0.4% of GDP, for flood damage in a 2024 budget amendment,
25% above an initial estimate by ING economist David Havrlant early this week.
This
could push the Czech deficit close to the 3% set under EU rules, up from an
original 2.5% target, with next year's deficit now also projected above earlier
plans.
Steffen
Dyck, Senior Vice President at Moody's Ratings, said that although the region
appeared better prepared than in the past to manage flooding, it was having to
deal with incidents and their economic impact more regularly.
"There
might still be an impact on government spending, depending on the ultimate
damage, and some countries, like the Czech Republic and Poland, have already
announced immediate emergency fiscal support," Dyck said.
The
unexpected pressure on Czech finances highlights the scale of the challenge
facing the rest of the EU's eastern member countries still grappling with
larger deficits ranging from nearly 7% in Romania to more than 5% in Poland and
Hungary.
LONG-TERM VIEW
A
Reuters analysis of draft budgets and government announcements on fiscal plans
shows Poland and Hungary could take most of this decade to reduce shortfalls to
below 3% while Romania may not achieve this until the 2030s.
For
Poland, the region's largest economy, Moody's predicts general government debt
could rise to 60% of GDP by 2027 due to increased borrowing, which will lift
debt-related expenditure.
Moody's
expects the Polish budget deficit to exceed 5% of GDP in 2025, followed by
"very gradual consolidation" towards a 3% shortfall over the next
four to five years.
Saddled
with the cost of flood repairs, Poland will now push for some more EU leeway in
shoring up its state finances.
Fitch
Ratings said spending pressures in Poland were "greater than
anticipated" after Warsaw unveiled its 2025 budget draft, though a solid
revenue base provided support.
The
floods hit a region already reeling from a weak German economy, the destination
for 20-30% of central European exports, with possible long-term ramifications
for state finances.
"CEE
growth prospects could suffer if Germany's economic weakness proves structural
and protracted," Karen Vartapetov, Director and Lead Analyst for CEE and
CIS Sovereign Ratings at S&P Global said.
"Weaker
medium-term growth in turn could pressure CEE public finances at a time when
government funding costs remain high."
Debt
servicing costs surged to 4.7% of GDP in Hungary and 2% in Poland and Romania
last year, with only the Czech Republic's 1.3% of GDP interest bill running
below the EU average -- but still nearly twice the 0.7% level seen before
COVID-19.
Romania
has yet to unveil a 2025 budget, with Bucharest considering a seven-year
timeframe to rein in its deficit from the EU's highest levels, which some
economists say could reach up to 8% of GDP this year due to a costly pension
reform.
Hungary,
whose budget deficit has averaged nearly 7% of GDP since the pandemic, has
pledged to lower it to 4.5% of GDP this year, though Moody's expects it to be a
full percentage point higher even after recent attempts to curb the gap.