BUDAPEST Central Europe's fast-growing economies have become an island of stability for investors in turbulent global markets this year, and more European Central Bank policy loosening could add to the region's appeal.
The economies of the European Union's eastern wing grew at rates of 3 percent or even faster in 2015 on strong exports and rising domestic demand, drawing in investors despite fears of a Chinese slowdown and falling oil prices.
Those investors have also had to deal with local, home-grown risks. Policies brought in by Poland's eurosceptic new government have worried banks, weighed on the zloty and angered the European Union. Millions of workers have headed west, in a drain of brains and skilled labour.
But inflows of EU development funds have boosted investment, while low oil prices have cut import costs. Labour costs remain relatively cheap, making these former communist countries attractive to big car makers and other foreign firms.
Hungary's forint and Romania's leu have been the best-performing emerging currencies globally this year versus the dollar. And they could appreciate more if the ECB pumps up its stimulus and rate hike fears in the United States recede.
"It's been visible in the past one and a half months that amid the waves of risk-aversion, the CEE region has been a kind of safe haven," said Gergely Forian-Szabo, fund manager at Pioneer Investments in Budapest.
Forian-Szabo said the region's assets could be especially attractive to those euro zone investors who want to diversify their portfolio from some euro zone peripheries like Spain or Italy and are too scared to buy risky Russian or Turkish assets.
While 10-year Italian or Spanish bonds carry yields of around 1.60-1.74 percent, Hungary's 10-year yield trades at 3.37 percent while Poland's corresponding bond at 3 percent and Romania's 10-year bond at 3.28 percent - a nice upside in a world where negative rates are becoming common.
Even in Poland, where the new government's bank tax, stronger controls on public institutions and other policies helped trigger a ratings downgrade, yields have declined in the past weeks.
Central Europe's main economies are in better shape now than the euro zone's weaker members after their recovery from the 2008 crisis.
Growth is solid, budget deficits are under control, and Hungary and the Czech Republic posted record high trade surpluses last year. The Czech economy grew at its fastest pace since 2007 last year at 4.3 percent, Poland grew 3.6 percent, Romania 3.7, while Hungary at 2.9 percent.
"Despite external headwinds, Central Europe continues to perform well, powered by healthy domestic demand," JP Morgan said in a note. "Sentiment remains upbeat, job growth is solid, and headline inflation is low."
With inflation low and the ECB expected to ease policy further, many Central European central banks are also mulling loosening. They may have to act to counter an appreciation of their currencies if that starts hurting the economy and drives inflation even lower.
The Czech National Bank could be the first in the region to take rates into negative territory. It has been intervening to keep the crown on the weak side of 27 to the euro.
Serbia unexpectedly trimmed rates to 4.25 percent last week, while rate cut expectations are lingering in Poland.
Hungary's central bank has already signalled it might implement further loosening "primarily using its unconventional toolkit." Hungary's debt is expected to be raised to investment grade from "junk" this year.
OUTFLOW OF SKILLED LABOUR
Some of this expected monetary easing has been priced into markets, but global risks could affect the region negatively.
"The largest risk for the group (of main CEE currencies) relates to tail events specific to Europe – i.e. Brexit, quite significant for open economies such as Czech, also Hungary," said Roxana Hulea at Societe Generale.
On the home front, the outflow of workers is unlikely to be reversed any time soon, while wage demands at home are growing. Hungarian railway workers and bus drivers are planning strikes.
Eniko Szijj-Wieland, owner of Hungarian firm Optimum Trend, has been hiring skilled workers such as welders and electricians for jobs in southern Germany in the past two years.
"Skilled workers mostly say they don't earn enough here, even if they work in several shifts, to be able to get by," she said, adding that an electrician earns a net 150,000 forints ($536.98) a month in Hungary, while in Germany he can get 2,100 euros.
($1 = 279.3400 forints)
($1 = 0.8981 euros)
(Writing by Krisztina Than; Editing by Andrew Heavens)
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