Call for applications: Klaus Liebscher ­ Economic Research Scholarship

The scholarship program targets Austrian and international experts with a ­proven research record in economics and finance, and postdoctoral research experience. Applicants need to be in active employment and should be interested in broadening their research experience and expanding their personal research networks. Given the OeNB’s strategic research focus on Central, Eastern and South­eastern Europe, the analysis of economic developments in this region will be a key field of research in this context.

The OeNB offers a stimulating and professional research environment in close proximity to the policymaking process. The selected scholarship recipients will be expected to collaborate with the OeNB’s research staff on a prespecified topic and are invited to participate actively in the department’s internal seminars and other research activities. Their research output may be published in one of the department’s publication outlets or as an OeNB Working Paper. As a rule, the consultancy services under the scholarship will be provided over a period of two to three months. As far as possible, an adequate accommodation for the stay in Vienna will be provided. ¹

Applicants must provide the following documents and information:

• a letter of motivation, including an indication of the time period envisaged for the consultancy
• a detailed consultancy proposal
• a description of current research topics and activities
• an academic curriculum vitae
• an up-to-date list of publications (or an extract therefrom)
• the names of two references that the OeNB may contact to obtain further information about the applicant
• evidence of basic income during the term of the scholarship (employment contract with the applicant’s home institution)
• written confirmation by the home institution that the provision of consultancy services by the applicant is not in violation of the applicant’s employment ­contract with the home institution

Applicants will be notified of the jury’s decision by end-November.

Developments in selected CESEE countries

Coronavirus overruns the region ² , ³ , ⁴

1 Regional overview

This report gives an overview of the economic situation prior to the corona­virus pandemic and sheds light on macroeconomic strengths and weaknesses and the associated policy space for the CESEE region. It then sketches the development of the coronavirus crisis in CESEE and the policy measures implemented so far.

Pre-coronavirus: moderating though still broadly robust economic growth amid often slowly rising price pressures

GDP figures for the second half of 2019 were broadly in line with the trends outlined above (see table 1). Real GDP growth in Turkey accelerated to 1.9% (quarter on quarter) in the fourth quarter of 2019 – by far the strongest reading in the CESEE region. Decelerating economic momentum was reported for the ­CESEE EU Member States, where average GDP growth came in at 0.7% (quarter on quarter) in the final quarter of 2019. This was a rather weak reading compared to the dynamism of the past three years. GDP growth in Russia amounted to 0.6% (quarter on quarter) in the fourth quarter of 2019 and was broadly in line with CESEE EU Member States’ figures.

Table 1: Real GDP growth

	2017	2018	2019	Q3 2018	Q4 2018	Q1 2019	Q2 2019	Q3 2019	Q4 2019
	Period-on-period change in %
Slovakia	3.0	4.0	2.3	1.0	0.4	0.6	0.3	0.4	0.6
Slovenia	4.8	4.1	2.4	1.0	0.8	0.5	0.0	0.8	0.4
Bulgaria	3.5	3.1	3.4	1.0	0.8	1.0	0.7	0.7	0.8
Croatia	3.1	2.7	2.9	0.2	0.4	1.1	0.6	0.6	0.3
Czech Republic	4.4	2.8	2.6	0.6	0.9	0.6	0.5	0.4	0.5
Hungary	4.3	5.1	4.9	1.5	1.2	1.4	1.0	1.1	1.0
Poland	4.9	5.1	4.1	1.3	0.7	1.4	0.7	1.2	0.3
Romania	7.1	4.4	4.1	1.7	0.6	1.1	0.9	0.6	1.5
Turkey	7.5	2.8	0.9	–1.1	–2.4	1.3	1.2	0.4	1.9
Russia	1.8	2.5	1.3	0.4	0.4	–0.1	0.6	0.5	0.6
CESEE average1	4.0	3.2	2.0	0.3	–0.2	0.6	0.8	0.6	0.9
Euro area	2.5	1.9	1.2	0.2	0.4	0.5	0.1	0.3	0.1
Source: Eurostat, national statistical offices.
1 Average weighted with GDP at PPP.

Growth remained firmly rooted in domestic demand. Private consumption made the strongest contribution to GDP growth in seven of the ten countries ­under observation. It continued to benefit from benign labor market conditions and swift wage growth. Furthermore, consumer sentiment was robust until most recently and consumer credit expanded swiftly.

Unemployment rates have been falling consistently in recent years, from an average level of around 10% in early 2013 to 3.4% in February 2020. This ­represents the lowest reading since the start of transition. Furthermore, employment kept expanding throughout most of the region up to the outbreak of the pandemic, ­contributing to a convergence of employment rates toward euro area levels.

Investment also supported growth throughout most of CESEE in the second half of 2019. Capital spending was bolstered by high capacity utilization, favorable financing conditions, robust construction activity and the availability of EU ­funding in many countries. In some countries, however, poor export prospects already led companies to postpone or scale down investment. This was especially the case in Slovenia, where growth in capital formation dipped into the red. A notable ­deceleration of investment growth was also observed in Croatia, Hungary and ­Poland, coming down from very high levels, however.

Export growth continued to soften in the review period, mirroring declining world trade amid lower international demand. Given the high import content of CESEE’s export production, import growth was also somewhat lower. On ­balance, the external sector often contributed negatively to GDP dynamics, especially in Russia and Turkey.

Despite somewhat lower growth rates, means of production – especially labor – continued to be utilized in full in the second half of 2019. High GDP growth, ­emigration and a lack of skilled workers had led to labor shortages in the past years. This translated into high wage growth rates that reached up to 12% annually. The situation has relaxed in recent months and both wage growth and labor shortages came down somewhat (e.g. annual nominal hourly wage growth declined to around 9% by the end of 2019). Nevertheless, the region’s economies mostly ran above full potential. The positive output gap for the CESEE EU Member States in 2019 was estimated at an average 2% of GDP by the European Commission.

This translated into higher inflation rates. Average HICP inflation came in at 3.7% in January and 3.6% in February 2020 in the CESEE EU Member States, the highest level since late 2012. While this in part reflects higher energy prices up until February, core inflation was on the rise, too. In February 2020, it reached an average of 3.3%. Several central banks (e.g. in the Czech Republic, Hungary, ­Poland and Romania) have missed their inflation targets in recent months (at least temporarily).

In Turkey, inflation came down from around 25% in late 2018 to a three-year low of 8.6% in October 2019. However, price growth subsequently reaccelerated to 12.4% in February 2020, owing in part to unfavorable base effects. Among the HICP components, it was especially industrial goods prices that fueled the ­increase.

Russia was the only country with a clear downward trend in inflation in recent months. In February 2020, price growth declined to 2.3% (from 4% in September 2019), well below the central bank’s target of 4%. The most important building block for this development was a base effect from a value-added tax increase in January 2019. Other disinflationary factors included a decline in prices of food products and non-food goods.

Regional central banks reacted to inflation developments. The Czech central bank increased its policy rate by 25 basis points to 2.25% in February 2020 after having missed its inflation target for three months in a row.

The Turkish central bank decreased its policy rate in four steps, from 16.5% in early October 2019 to 10.75% in late February 2020, reversing most of its ­crisis-induced rate hikes carried out after the turbulences in mid-2018. It argued that the improvement in macroeconomic indicators supported the fall in the ­country’s risk premium. The exchange rate of the Turkish lira vis-à-vis the euro remained broadly stable from October 2019 until the end of February 2020.

The Russian central bank cut its key rate in three steps, from 7% in early ­October 2019 to 6% in late February 2020, citing disinflationary pressures and – in its February move – rising risks of a substantial global economic slowdown.

Coronavirus crisis: macroeconomic strengths and weaknesses and policy space for the CESEE region

The period before the great financial crisis was characterized by twin deficits in the external and public sector accounts in many countries of the CESEE region. At the outbreak of the coronavirus crisis, the region reported a combined current and capital account surplus of 2.2% of GDP (end-2019). Among the individual ­CESEE countries, only Romania recorded a notable current account deficit in 2019 (see chart 1). The external adjustment of the region was driven predominantly by better outcomes in the goods and services balances. The momentum in the trade balance initially rested on strongly reduced domestic demand at the height of the global financial crisis that led to a substantial decline of imports. Trade in goods, however, also benefited from the close integration of the CESEE (EU) region in international supply chains as the associated rise in competitiveness bolstered ­export growth after the acute crisis years. In recent quarters, pronounced (­productivity-adjusted) wage increases in the manufacturing sector have already shaved off some of the competitive edge of the region, however.

Yet, some CESEE countries belong to the world’s most tightly integrated in terms of global value chains (see chart 2), which implies a high vulnerability in the current crisis. All countries under observation are more strongly integrated than the OECD average, and the degree of integration in countries like the Czech ­Republic, Hungary and Slovakia is even five to six times as high. Global production networks could be an important transmission mechanism for shocks throughout the global economy and have already been disrupted at an early stage by the ­stoppage of production in China. Furthermore, global value chains not only ­transmit shocks in supply, they also transmit shocks in demand. As an example, the automobile industry in CESEE will not only be impaired by a lack of Chinese ­inputs into domestic production, but also by a decline in Chinese auto demand via falling sales of international (especially German) car producers that usually obtain inputs from CESEE.

International trade also acts as a transmission mechanism for coronavirus-­related shocks. Chart 3 shows that the degree of openness has mostly increased since the global financial crisis and is especially high in the Central European EU Member States (up to three times as high as in the EU-15). Even though the ­geographical distribution of CESEE countries’ trade remains very much centered on the EU-15, the weight of China and the U.S.A. as the largest and second-largest global economies (in terms of purchasing power parity) in final demand for CESEE products must not be ignored given the strong integration in international value chains.

Further, tourism will be one of the sectors most strongly affected by the ­coronavirus recession; this warrants a closer look at the importance of this sector for CESEE (see chart 4). In terms of dependence on tourism, the CESEE countries can be broken down into roughly three groups. The first group includes Poland, Russia, Romania, Slovakia, the Czech Republic and Hungary. These countries ­reported a share of tourism in total GDP of between 5% to 8%. The second group includes Bulgaria, Turkey and Slovenia, with a share of tourism of around 11% to 12% in total GDP. Finally, Croatia is in a league of its own, with a share of tourism in GDP and employment of around 25%, making it the country most dependent on tourism in the whole region (and in fact also throughout much of Europe).

Finally, we take a look at foreign capital flows and external debt to get an idea of the sustainability of the external position of the CESEE region. For the region as a whole, external liabilities in the international investment position (IIP) ­increased by some 20 percentage points of GDP between 2008 and 2019 (see chart 5), mostly on account of FDI inflows (+16.3 percentage points of GDP) but also on account of higher portfolio liabilities (+10.7 percentage points of GDP). Other ­investments were the only component of IIP liabilities that posted a notable decline (–6.4 percentage points of GDP). The latter mainly reflected two things: The ­deleveraging of international banking groups in the region and the change in the refinancing structure of CESEE banking sectors away from external liabilities to domestic deposits. The outlined dynamics in IIP liabilities translated into a somewhat higher gross external debt of the CESEE region (+4.9 percentage points of GDP, reaching 48.7% of GDP in 2019; see chart 6). At the same time – supported by current account surpluses – reserves (including gold) also trended higher (+7.4 percentage points of GDP) and covered more than 50% of total external debt by the end of 2019.

Developments at the country level were heterogeneous, however. Between 2008 and 2019, a large degree of external deleveraging was observed for Hungary and Bulgaria (and to a lesser extent also for Croatia). In all three countries, the ­decline in IIP liabilities was almost exclusively driven by other investments, leading to a corresponding decline in gross external debt. The Czech Republic and ­Slovakia, by contrast, reported an increase in their external liabilities of more than 50 percentage points of GDP. Strongly rising portfolio and other investment ­liabilities – amid an also substantial upward trend in FDI – pushed up external debt in the two countries. In Turkey and Poland, the increase in IIP liabilities amounted to some 25 percentage points of GDP in the past decade. While, in the case of ­Poland, the increase rested on FDI and portfolio flows only, all IIP components contributed to the rise in Turkey. Hence, external debt in Turkey also posted a relatively large increase. Comparatively little change could be observed in ­Slovenia, Romania and Russia, where increases in FDI and decreases in other investments broadly leveled out.

Summing up, the region entered the current downturn with its external ­accounts in broadly solid shape. Combined current and capital accounts were mostly in surplus and an increase in external debt was buffered by an even larger increase in reserves. On the country level, Romania was the only country to ­report a notable current account deficit in 2019. Most of the shortfall, however, was ­covered by capital (mostly FDI) inflows. Given the high degree of openness and the strong integration in global value chains, Central European countries (especially Hungary, the Czech Republic and Slovakia) will most likely be more affected by a slowdown in global demand. The sudden stop in international mobility will particularly dampen the Croatian economy, as the country is highly dependent on tourism. Finally, Turkey experienced a rather large increase in external debt amid broadly unchanged international reserves, leaving the coverage of external debt by foreign exchange reserves among the lowest of the region. Furthermore, exchange rate risks are high given the Turkish lira’s strong volatility in recent years and the country is also rather susceptible to the effects of a sudden stop in tourism.

A central question on the eve of the recession is whether fiscal policy has enough room for maneuver to weather the fallout from the coronavirus crisis. ­Ideally, policymakers would want to rely on automatic fiscal stabilizers, discretionary fiscal stimuli and favorable financing conditions to shield companies, workers and households from the most severe consequences of the coronavirus-induced economic slump. The ability to do so crucially depends on a country’s fiscal space.

A look at general government net lending in the region reveals that most ­CESEE countries managed to substantially bring down headline deficits as well as ­cyclically adjusted budget deficits from the heights after the global financial crisis (see chart 7). Measures to improve revenue collection combined with strong economic growth in recent years have underpinned a notable improvement in public finances. In fact, most countries reported notably lower deficits in 2019 than they did before the outbreak of the global financial crisis in 2008.

The reform momentum, however, stalled somewhat in 2019. Six of the ten countries under observation reported higher headline deficits (lower surpluses) than in 2018, despite continuing robust economic momentum. An expansionary fiscal stance was also documented by the deterioration in the (projected) cyclically adjusted deficits of most CESEE EU Member States.

In Romania, the headline deficit increased to 4.3% of GDP, 1.3 percentage points of GDP above the Maastricht threshold. Romania has been in a significant deviation procedure (SDP) since 2017. In November 2019, the European ­Commission commented that the Romanian authorities do not intend to act upon the recommendations issued within the SDP and that the new pension law poses a significant upward risk to the public deficit in 2020 and beyond. Against this background, an excessive deficit procedure (EDP) was launched in spring 2020. ­Hungary – the second country subject to an SDP – was on a better trajectory ­before the coronavirus hit the region. In its November 2019 report, the European Commission noted that the Hungarian economy was experiencing good times, with an improvement in the overall fiscal situation.

After the start of transition, CESEE public sectors had been known for their low indebtedness for a long time. The global financial crisis thoroughly altered this situation, however (see chart 8). Discretionary fiscal spending and large-scale banking sector support in several countries drove up general government debt to more “normal” European levels after 2008. Strong economic dynamics in recent years reversed some of these increases, but debt levels mostly remain substantially higher than ten years ago. In Turkey, government debt even displayed a clear ­upward trend in the past two years as the country went through a recession. Russia reports the by far lowest public debt and the country’s National Welfare Fund holds about USD 150 billion in liquid assets (9% of GDP).

For fiscal sustainability, it is not only the level of debt that matters but also its composition. With respect to the creditor structure, a large share of foreign ­investors can drive up risk premiums and impede access to market funding and favorable financing conditions in turbulent times. Domestic investors (such as ­pension funds), by contrast, are usually more long-term oriented and less prone to swings in sentiment. The share of domestic investors is relatively low in CESEE, partly because comparatively shallow capital markets make it hard to issue ­sufficient portions of sovereign debt domestically. Chart 9 shows that nonresidents on ­average held close to 50% of total debt in CESEE in 2019. In Slovakia and Slovenia, the shares reached close to 70% and displayed a notable upward trend.

If we look at the currency denomination of public debt, we find that the share of foreign currency-denominated debt in total debt is rather high in many CESEE countries given the strong presence of nonresident investors (see chart 10). ­Exchange rate risks, however, are mitigated by two factors: The euro is the most important foreign currency in the CESEE EU Member States, given their close trade, financial and business cycle linkages with the euro area and the associated hedging possibilities. Second, the stock of euro-denominated debt is ­especially high in those countries that have pegged their currencies to the euro or whose ­exchange rate policy is strongly focused on the euro (Bulgaria, Romania, Croatia). Among the non-EU countries, a high share of (mostly U.S. dollar-­denominated) foreign currency debt can be observed in Turkey. In Russia, the share of foreign currency-­denominated government debt has decreased notably in recent years as sanctions have made tapping international markets increasingly ­difficult for the country.

Regarding the ratings for long-term foreign currency sovereign debt, Slovakia, Slovenia, the Czech Republic and Poland currently show the strongest ratings (see chart 11). Bulgarian, Hungarian, Romanian and Russian government bonds are assessed as moderately risky. While Standard & Poor’s applies the moderate risk category also to Croatia, Moody’s sees a substantial credit risk for the country. Turkey is the lowest-rated country in the CESEE region, with credit risk being deemed high by both rating agencies. Comparing 2008 and today, current ratings by Moody’s are often somewhat weaker than before the global financial crisis, while no major changes can be observed in the country risk assessments released by ­Standard & Poor’s.

Short-term debt issuance is usually associated with lower funding costs but – at the same time – it is also associated with higher interest and rollover risks ­especially in times of turbulence. Since the global financial crisis, the share of short-term debt in total debt has fallen substantially in all CESEE countries except Russia (see chart 12). In some cases, it has reached long-term lows. This development was ­related to favorable market conditions in an environment of prolonged monetary accommodation that favored the issuance of long-term debt.

Summing up, despite some recent deterioration, CESEE countries’ budget deficits are generally lower than in 2008, and three countries even reported ­surpluses in 2019. However, public debt levels have increased substantially throughout most of the region. The structure of public debt remains skewed toward nonresident investors and – at least in some countries – foreign currency-denominated debt. On a positive note, refinancing risks have been reduced considerably due to a lengthening of debt maturities. Therefore, the recent increase in government bond spreads (see below) does not pose an immediate threat.

On the country level, Romania and Turkey seem to be exposed most strongly to public finance risks. Romania’s public finances have deteriorated throughout the past years and the country is currently subject to an excessive deficit procedure (the only ongoing EDP in the EU). Its debt level has nearly tripled since 2008. ­Furthermore, it scores relatively high in terms of the share of nonresident investors and foreign currency public debt. Turkey has by far the weakest country rating in the CESEE region and reports a relatively large (and rising) share of U.S. dollar-­denominated debt amid pronounced exchange rate volatility in recent years.

In recent years, credit growth accelerated in an environment of strong GDP growth, ample liquidity and low interest rates in most CESEE countries. Some credit segments already displayed first signs of overheating. This applies in particular to housing loans, which grew swiftly given strong housing demand and ­ever-increasing housing prices. Several CESEE countries (especially EU Member States) have introduced macroprudential measures and/or recommendations to put a brake on this development. Furthermore, countercyclical capital buffers were activated in Bulgaria, the Czech Republic and Slovakia.

Compared to 2008, banking sector risks in CESEE have moderated. For ­instance, the share of foreign currency-denominated loans in total loans to the ­private sector has declined throughout most of the region (see chart 13). This downward trend is particularly pronounced in loans to households, which is ­especially welcome as the sector is usually unhedged against exchange rate changes. At end-2019, the foreign currency share in loans to households was virtually zero in ­Slovakia, Slovenia, the Czech Republic, Hungary and Russia (in Turkey, foreign currency loans to households have been legally banned). Several countries (most prominently Hungary and Croatia) introduced conversion schemes for foreign ­currency loans to households into local currency loans that fueled this downward trend. It needs to be noted, however, that the foreign currency share in corporate loans remains notably higher. Such loans have received more policy attention ­recently. The IMF has intensified its warnings on high levels of corporate debt in emerging markets, and the sharp depreciation of the nominal effective exchange rate of the Turkish lira in 2018 as well as the recent pandemic-­induced ­depreciation of some of the region’s currencies has illustrated potential risks.

The decline in foreign currency loans has contributed to a higher quality of banking sector assets, as has the decline in nonperforming loans (NPLs). A ­comparison of the shares of nonperforming assets in total assets for 2008 and 2019 does not yield a clear-cut regional trend (see chart 14). Compared to 2013, ­however, when the global financial crisis and crisis legacies pushed NPL ratios to 15% or more in several countries, NPL ratios have come down substantially. This positive momentum can be attributed to favorable lending developments as well as to the strong general economic momentum. Furthermore, active portfolio ­cleansing measures – including writing off bad debt, selling NPL portfolios as well as restructuring and forbearance agreements and the transfer of NPLs to bad banks – also positively impacted the stock of nonperforming assets. In Russia, NPLs also decreased somewhat in the past two years after the 2014 recession and the banking sector turbulences in late 2017 (which led to the nationalization of three ­medium-sized credit institutions together accounting for about 7% to 8% of banking assets). Turkey was the only CESEE country to report higher NPLs in the past few years. The increase in Turkish NPLs reflected the financial difficulties ­associated with the 2018 financial turbulences faced by indebted companies – ­particularly those with debts in foreign currency.

Another positive development was observed in CESEE banking sectors’ ­refinancing structure. Over the past years, the refinancing structure has shifted from external liabilities to local deposits. This makes CESEE banks less vulnerable to swings in international sentiment and the possible (and in a worst case synchronized) withdrawal of foreign capital. At end-2019, seven of the ten countries under observation reported a (partly substantial) overhang of private sector deposits ­relative to domestic banking sector claims (see chart 15). Banking sectors in Slovakia and Turkey reported a moderate funding gap (on a notable declining trend in the case of Turkey), while only Russia recorded a persistently high funding gap of around 10% of GDP.

On top of that, the risk-bearing capacity of CESEE banking sectors has ­improved. Capital adequacy ratios have increased throughout the region, in most countries substantially so (see chart 16). Capitalization is not only higher than in 2008, it is also high compared to other European countries. The by far weakest capital base was reported for Russia.

Summing up, risks emanating from the banking sector – a main transmission channel in the global financial crisis – currently seems to be relatively contained. Credit growth is swift (in certain segments probably too swift) but credit is stably funded by local deposits. Asset quality has improved, and banking sector portfolios today are generally less risky than a decade ago. Among the individual countries, Russia and Turkey are exposed to the highest risks. In Russia, domestic claims are notably higher than domestic deposits, capitalization is weak and the NPL ratio is the highest in the region (accompanied by a coverage ratio of only somewhat above 50%, which is the lowest level in CESEE). At the same time, credit growth ­remains high and strongly driven by uncollateralized consumer loans. Turkey was the only country to report negative dynamics in nonperforming assets. While consumers are banned from foreign currency borrowing, the stock of foreign currency-­denominated lending in corporate credit remains stubbornly high. This exposes corporations to exchange rate risks amid large (short-term) negative foreign ­currency positions. Finally, the Turkish banking sector still reports a positive – though declining – funding gap.

Spread of coronavirus: CESEE was affected later and to date less strongly than other regions

Table 2: Key indicators regarding COVID-19 spread in CESEE (mid-April)

	Current number of ­official cases	Infections per million inhabitants	Daily increase of cumulative cases (average of last 5 days, %)	Days since first reported case	Cumulative ­deaths	Deaths per ­million inhabitants
SK	835	152	4	40	2	0
SI	1,220	581	2	42	56	27
BG	713	103	3	39	35	5
HR	1,704	416	4	50	31	8
CZ	6,141	574	2	45	161	15
HU	1,579	164	6	42	134	14
PL	7,202	191	5	43	263	7
RO	6,879	358	6	49	344	18
TR	65,111	806	9	35	1,403	17
RU	21,102	145	16	75	170	1
CN	83,293	60	0	>110	3,344	2
AT	14,234	1,582	1	50	384	43
IT	162,488	2,708	2	76	21,069	351
Source: European Centre for Disease Prevention and Control, OeNB calculations.

The Global Health Security Index (developed by the Johns Hopkins Center for Health Security, the Nuclear Threat Initiative and The Economist Intelligence Unit) provides a rough estimate of the health security capabilities in CESEE. The subcomponents of the index that are related to responding to and mitigating the spread of an epidemic and to the quality, coverage, resilience and robustness of the health sector are especially relevant in the current situation. In both categories, CESEE countries do not score notably worse than Austria or Italy. Some countries even outperform Western European peers, e.g. Slovenia, Poland and Turkey. Rather low capabilities of dealing with pandemics, however, are reported for ­Romania, Slovakia and especially Bulgaria.

While the Global Health Security Index suggests that health-related risks from the coronavirus pandemic are generally in line with other European countries, two factors should be noted: (1) The median age of the population in CESEE is rather high and the age distribution of the population skewed toward older age cohorts (this does not apply to Turkey, though). This implies a rather large high-risk group for serious COVID-19 infections. (2) Furthermore, studies ⁵ suggest that case-­fatality rates are strongly positively related to a country’s share of working-age families living with their parents (multigeneration households). Such living ­arrangements increase intergenerational contacts and enable the virus to spread more quickly to high-risk older strata of the population. Multigeneration households are especially widespread in several CESEE countries (e.g. in Slovenia, ­Bulgaria, Croatia and Poland).

Government responses to the spread of coronavirus: fast, comprehensive and associated with high economic costs

Government measures will, without any doubt, lead to large economic costs. The extent of these costs, however, is still very hard to gauge as no hard data on production and sales for the period in question is available at the time of writing (for our current forecast for GDP growth in CESEE, see the Outlook for selected CESEE countries in this issue). However, some indicators suggest that public life has temporarily come to a standstill and that economic activity has declined ­notably. Chart 19 shows mobility trends published by Google, which are based on visits and the length of stays at different places. For example, mobility observed at transit stations (e.g. public transport hubs such as subway, bus and train stations) declined by more than 50% on average in the CESEE region in mid-April ­compared to early February 2020. The reduction was even more pronounced in the area of retail and recreation (e.g. at restaurants, cafés, shopping centers, theme parks, ­museums, libraries and movie theaters), where mobility declined by 70% on ­average (up to 90% in the case of Turkey). The same is true for international ­mobility. Flight departures from international capital airports had basically come to a standstill by mid-April (see chart 20).

Table 3: Selected financial market indicators

	Exchange rate versus euro	Equity index	Euro-denominated1 ­government bond yield spread versus euro area	Sovereign credit default swap premium (5-year)
	%	%	Basis points	Basis points
CZ	–6.2	–26.0	59	20
HU	–6.0	–29.0	69	42
PL	–6.6	–22.8	54	29
SK	n.a.	–6.6	n.a.	11
SI	n.a.	–14.5	n.a.	n.a.
HR	–2.3	–21.8	155	28
BG	Currency board	–20.2	74	21
RO	–1.1	–13.6	156	40
RU	–16.1	–18.0	146	50
TR	–12.3	–16.2	365	326
Source: Macrobond.
Note: Year-to-date changes observed on April 14, 2020. A negative value in the first column indicates depreciation.
1 RU: EMBIG (USD-denominated eurobonds) used instead of Euro-EMBIG (EUR-denominated eurobonds).

Mirroring these figures, sentiment in CESEE has plummeted (see chart 21). In April 2020, the European Commission’s Economic Sentiment Indicator (ESI) for the CESEE EU Member States dropped by nearly 40 points and declined to its lowest level in history. A similar development was observed in the Purchasing Managers’ Index (PMI) for Russia and for Turkey. Both indexes descended into free fall in April 2020 and reported values of only 31.3 and 33.4 points, respectively, far below the 50-point threshold indicating an economic expansion.

The impact of the coronavirus crisis on financial market indicators was immediate and substantial. A deterioration was observed in all financial market segments and in all countries. The strongest impact was reported for equity prices, which declined by up to 29% against the start of the year in Hungary. Euro-­denominated eurobond spreads also increased strongly in all countries against the backdrop of increasing sovereign credit default risk and a notable depreciation of national currencies against the euro. The countries most affected by the sell-off were Turkey, Russia, Romania and Croatia, not least because of higher macro­financial vulnerabilities (as outlined above).

Governments throughout CESEE have taken extensive measures to alleviate the fallout from the ensuing greater economic crisis (for a more detailed overview see country chapters). Fiscal support measures have included, among others, ­deferring tax and social security contributions for affected enterprises, taking over part of the salary payments to employees and extending paid sick leave. Some countries have increased the pay for key sectors, including the salaries of medical professionals. Governments in many countries have also taken measures to avoid liquidity shortages in the real sector, often jointly with commercial banks and development banks; in some cases, these measures include state guarantees. Moratoria for debt repayments have also widely been recommended and implemented.

CESEE central banks have also been quite active and made use of their full tool kit. Following the onset of the pandemic, key policy rates were cut in the Czech Republic (by 125 basis points to 1%), Poland (100 basis points to 0.5%), Romania (50 basis points to 2%) and Turkey (100 basis points to 9.75%). The Croatian ­central bank also inter­vened on the foreign currency markets to contain ­depreciation pressures. Liquidity provision measures for banks including ­longer-term refinancing operations and additional foreign currency swap auctions were launched in several countries, and some central banks also started buying bonds of their respective governments (e.g. in Croatia, Hungary, Poland, ­Romania). In mid-April, the Croatian and the Bulgarian central bank announced swap lines with the ECB. Easing measures regarding the regulatory frame­work have also been announced. They include, among others, a revision of (planned) countercyclical capital buffer rates (e.g. in Bulgaria and the Czech Republic).