Emerging Europe will weather storm from China

Significance

The currency and debt markets of Central-Eastern Europe (CEE) are proving resilient to fallout from the turmoil in China's financial markets, now the primary determinant of investor sentiment towards developing economies. Negligible trade linkages with China and liquidity support from the ECB are helping underpin favourable sentiment towards the region.

Impacts

• EM equity and bond funds will continue to suffer outflows, following record bond redemptions in 2015, which continued into early January.
• The dramatic slide in oil prices is putting further downward pressure on CE inflation rates; there is outright deflation in Poland.
• Hungary is mulling further cuts in interest rates.
• Despite Turkey's favourable status as a major oil importer, its currency has plunged by 31% against the dollar over the past year.
• For CE, the lower the oil price, the greater the likelihood of further ECB stimulus, buoying local bonds and currencies further.