Central Europe sees shift in fortunes

Hungary, the top performer of the region in recent years, is struggling with fiscal and external deficits alongside an economic slowdown, but Poland’s economy shows improved competitiveness, said Yianos Kontopoulos, chief global FX strategist at Merrill Lynch in New York.

Hungary’s economy has been affected by deteriorating exports and the country faces wide current account and budget deficits. "It has to rein in a twin deficit problem at a time where its economy has already begun slowing. This means policy tightening -- necessary to sustain macroeconomic stability -- might result in a drastic downshift of activity," said Kontopoulos. Poland’s economy, however, has picked up this year. The current account deficit has narrowed to the lowest in years and fiscal policy is likely to further stimulate domestic demand, he added.

The current account and external trade balances are one indication that Hungary’s competitiveness has been eroded, and other data corroborates that concern. Net foreign direct investment as a share of GDP fell to 0.8% in the 12 months up to July 2003, down from 1% in mid-2002 and well below the 1.7% ratio of Poland.

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