Emerging markets: looking at Eastern Europe

Romania is the seventh-biggest economy in the European Union¹ and operates in key sectors such as manufacturing, agriculture, energy, automotive and services. The country has harnessed its own coal, oil and gas resources, together with its production of renewables, and was able to turn to other suppliers when the Russia-Ukraine war broke out and sanctions on Russia were tightened.

The deterioration in business relations between Western countries and Russia has also strengthened the nearshoring phenomenon to Romania’s benefit. Uncertainties surrounding the war and higher production costs resulting from the energy crisis have led many border countries to outsource some of their activities to Romania, where costs are competitive and the workforce is qualified.

The global return of inflation has not spared Romania, but the country reacted quickly in a bid to quell rising prices. The Romanian central bank raised its key interest rate up to 7% in January 2023². The economy is already showing signs of slowing, calling for a more accommodative policy in the near future.

The country’s relative political stability, low public debt relative to its gross domestic product (GDP) and efforts to beef up its response to the environmental aspect of ESG criteria are all factors contributing to Romania’s attractiveness, particularly that of its external sovereign debt.

In its efforts to contain mounting inflation, Hungary began raising interest rates well before most developed countries and has had a policy rate of 13% since September 2022.

What’s more, the relative solidity of its macroeconomic fundamentals makes Hungary an attractive long-term issuer. Its rigorous fiscal policy, which was tightened in 2022 to tackle its soaring deficit, has helped to keep a lid on its debt, minimising the risk of a payment default.

Lastly, Hungary is actively seeking to improve its extra-financial aspects. The country has pledged to honour Europe’s carbon neutrality objective and plans to close its last coal-fired plant in 2025, while investing in renewable energies⁴.

In these conditions, Hungary can be a key issuer to diversify portfolios and potentially offer attractive yields:

• Local sovereign debt offers very attractive real interest rates for investors, who could also benefit tactically from an appreciation of its currency.

• The prospect of a global economic recession could also benefit Hungary’s external sovereign debt, which would offer long-term performance potential.