PRAGUE/WARSAW, Sept 20 (Askume) – Just a week ago, before deadly floods swept across central Europe , the Czech Republic was on track to become the first country in the region to reduce its budget deficit to below 3% since Covid-19 hit a specified cap percentage of gross domestic product.
Now, a small victory for public finances hangs in the balance as the Czech Republic and Poland, also hit by the floods, count the damage from the worst flooding to hit the region in at least two decades.
According to estimates by local authorities , damage to infrastructure in these two countries alone could reach $10 billion. Poland’s finance minister said a $5.6 billion EU fund would cover some but not all of the flood recovery costs.
Economic damage from extreme weather is adding pressure on state finances in a region still grappling with the COVID-19 pandemic and rising inflation after Russia’s 2022 invasion of neighboring Ukraine।
Since the outbreak, EU member states have defied the EU requirement to keep annual deficits at 3% of gross domestic product, and the region’s budget deficits have risen to 9% of GDP in Romania and 7% in Poland and Hungary.
Inflation and elections in Poland, Hungary, and Romania —which essentially promised leniency— further impeded deficit reduction .
Increased military investment, inflation-related pension payments, and higher debt-servicing costs also put pressure on the budget.
On Thursday, the Czech Finance Ministry said it would allocate 30 billion crowns ($1.3 billion), or 0.4% of gross domestic product, to tackle flooding in the 2024 budget revision , 25% more than a preliminary estimate by ING economist David Haverlant earlier this week.
This could push the Czech deficit closer to the 3% limit set by EU rules, higher than the original 2.5% target, while next year’s deficit is also now expected to be higher than previously planned .
Stephen Dyck, senior vice president at Moody’s Ratings, said while the region appears better prepared to handle floods than in the past, it will have to deal with emergencies and their economic impact more frequently.
“Government spending could still be affected depending on the final damage, and some countries such as the Czech Republic and Poland have announced immediate emergency financial support,” Dyck said.
The unexpected pressure on Czech finances highlights the scale of the challenge facing other eastern EU members, which are still struggling with large deficits, ranging from nearly 7% in Romania to more than 5% in Poland and Hungary.
Long-term perspective
A Askume analysis of draft budgets and announcements of government fiscal plans showed that Poland and Hungary could take the better part of this decade to reduce their deficits to below 3%, while Romania may not achieve that target until 2030.
For Poland, the region’s largest economy, Moody’s estimates that total government debt could rise to 60% of GDP by 2027 due to rising borrowing, which will boost debt-related spending.
Moody’s expects Poland’s budget deficit to exceed 5% of GDP by 2025, before the deficit “very gradually consolidates” to 3% over the next four to five years.
Poland, saddled with the cost of flood repairs, will now fight for more concessions from the EU to shore up its national finances.
Fitch Ratings said spending pressures in Poland were “higher than expected” after Warsaw unveiled a draft 2025 budget, though a solid revenue base provided support.
The floods have hit a region that is already struggling with Germany’s weak economy and is the destination for 20-30% of central Europe’s exports, with potentially long-term consequences for national finances.
“If Germany’s economic weakness is structural and long-term, growth prospects in Central and Eastern Europe could be affected,” said Karen Vartapetov, director and lead analyst for sovereign ratings in Central and Eastern Europe and the Commonwealth of Independent States at S&P Global.
“Weaker growth over the medium term amid higher government financing costs could put pressure on public finances in Central and Eastern Europe.”
Last year, debt servicing costs rose to 4.7% of GDP in Hungary, 2% of GDP in Poland and Romania, and only the Czech Republic’s interest payments at 1.3% of GDP were lower than the EU average but still almost double the pre-COVID-19 level of 0.7%.
Romania has yet to unveil its 2025 budget and Bucharest is considering a seven-year deadline to bring its deficit below the EU’s highest levels.
Hungary’s budget deficit has averaged about 7% of GDP since the outbreak began, and the country has pledged to reduce it to 4.5% of GDP this year , though Moody’s expects it to remain a full percentage point higher even after recent efforts to curb the deficit.
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