Central Europe external risks still outweigh internal

Significance

Investors are brushing off mounting political risks in Poland despite an erosion of democratic checks and balances under the nationalist Law and Justice (PiS) government. In Romania, despite the rapidly escalating political crisis, the leu has strengthened slightly against the euro since the start of this year, since when the yield on benchmark ten-year Romanian local bonds has risen by 25 bps to 3.6%. This is still significantly below the 5% level before the ‘taper tantrum’ in mid-2013, which stemmed from the unexpected decision by the US Federal Reserve (Fed) to end its asset purchases.

Impacts

• After post-US election outflows, EM mutual funds are once again enjoying sizeable inflows, with EM debt funds reaching a four-month high.
• Some of the strain on EM currencies will be relieved by the 2.5% fall in the dollar index against a basket of its peers since end-December.
• Smaller export-led CEE economies will benefit from factory orders in Germany rising in December at their fastest pace in 30 months.