The war in Ukraine has disrupted markets across the globe, but for nearby countries in Central and Eastern Europe (CEE), the economic impact has been particularly acute. Soaring energy prices, severe supply chain disruption, a refugee crisis and loss of access to Russian markets have put economies across the region under intense pressure.
In Poland, for example, red-hot inflation hit a 26-year high of 18.4% in February of this year, hitting household spending and industrial output and prompting ING to downgrade the country’s GDP growth forecast to 0.5% for 2023. Inflation in Czechia has also been high, currently around 15%, with similar consequences for consumer spending and GDP growth prospects.
The challenging current macroeconomic environment has constrained liquidity and affected the debt markets. Overall loan and bond issuance in CEE, Russia and the Commonwealth of Independent States fell to US$61.1 billion in 2022, the lowest annual total since 2015 and less than half the US$146.3 billion secured in 2021.
Czech and Polish governments lend a hand
In both Poland and Czechia, the fallout from the invasion of Ukraine has hit exporters especially hard, as Ukraine, Russia and Belarus have served as important regional export markets.
For example, Czech exports to Ukraine fell by 8% in 2022, a drop that would have been even larger if military and defense exports had been stripped out. Polish exports to Ukraine are also now dominated by military and defense.
Meanwhile, Czech exports to Russia and Belarus were down by 60% and 49% respectively, with Polish exports to Russia dropping by 45%. Declines in German exports to Russia are also likely to have filtered down supply chains and hurt exporters across the CEE.
Recognizing the pressures that their exporters are under, Prague and Warsaw have put various financial guarantee and support packages in place (often drawing from COVID-19 business support playbooks). The goal is to shield local companies from the direct economic impact of the war and the indirect consequences, including tight energy supply and rising prices.
In Czechia, the state-backed export credit agency EGAP has been a key part of the government’s policy response. During the pandemic, EGAP developed a new program (in addition to its core goal of supporting exports) that provided additional state guarantees for the funding of companies directly affected by lockdowns.
After the invasion, the program was expanded to provide financing guarantees to enterprises adversely affected by the war, with support available until at least the end of 2023. Access is based simply on a borrower’s written guarantee in which the guarantor declares that it will satisfy the creditor if the borrower fails to meet its financial obligations. Depending on the borrower’s credit rating, the guarantees cover between 80% to 90% of borrowings of qualifying companies.
The guarantees are available to all borrowers that have at least 100 employees and generate at least 25% of their revenues from exports. Qualifying borrowers also must be directly impacted by the conflict and any sanctions or countersanctions and require liquidity due to that exposure. Suppliers to qualifying exporters are also eligible for the funding guarantees.
Some exporters have raised concerns that the guarantees are not enough, and that a guarantee fee payable to EGAP is a hurdle to accessing support, but overall, the program has been well received.
Poland’s export credit agency KUKE has been used to deliver strategic support in a similar way to EGAP. Initially, KUKE offered guarantees of up to 80% to support companies through COVID-19 but has now expanded its program to cover companies impacted by the events in Ukraine.
Unlike the Czech program, however, KUKE is not just guaranteeing exporter credit, but also covering any domestic investment that will support exports. KUKE collects a fee for the guarantee upfront or spreads out fee payments annually across the life of the guarantee, and the initiative has been well received by Polish companies. In addition, KUKE signed cooperation agreements with its Ukraine counterpart and also with the Polish-Ukrainian Commerce Chamber to support Polish entrepreneurs with investment in Ukraine and its rebuild.
Figures for how many guarantees have been provided by EGAP and KUKE have yet to emerge, but the consensus is that the programs have given lenders the comfort to provide financing, and that lending volumes to exporters would have been lower without these guarantees in place.
Hoping for stability
Looking ahead to the rest of 2023 and into 2024, although energy prices have remained elevated, they have come down from the peaks observed in 2022, providing some hope that manufacturers in Poland and Czechia will see production costs cool in the next 12 to 18 months.
Borrowers that have not had to come to market to raise new capital and have hedged their existing borrowings will be squeezed when they do have to refinance, but export credit guarantee support has helped businesses to come through the worst of the economic shock following the invasion of Ukraine.
Inflation is still high and interest rates are rising; thus, times are still tough, but borrowers have a more stable foundation and are adapting to the “new normal” of higher borrowing costs and tighter terms.
