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WRAPUP - Economic impact of coronavirus outbreak in SEE by March 18

WRAPUP - Economic impact of coronavirus outbreak in SEE by March 18 Source:

SOFIA (Bulgaria), March 18 (SeeNews) - Automobile plants suspended production, airports closed down and privatisation plans were put on hold as the coronavirus pandemic spread across Southeast Europe (SEE).

The coronavirus infection reached the region last month February, with the first case reported in Croatia on February 25. By March 18 the number of confirmed cases of the novel coronavirus disease (Covid-19) in the region had exceeded 1,000 and most countries had declared a state of emergency. Restaurants and shops, with the exception of pharmacies and food stores, had pulled down their shutters and air carriers had cancelled most of their flights. 

As countries closed their borders, supply chains and relations with clients on foreign markets were disrupted. A drop in orders forced companies to scale down production and warn that they may need to lay off staff. The sectors most exposed to China were the first to take the blow but as the disease went global, its impact can now be seen across the board, fuelling fears of a looming economic slowdown and even recession.

Stocks plunged, and although the region’s banking sector is largely stable, certain money markets jolted. The Romanian leu, for one, hit a record low, as the coronavirus woes added to uncertainties caused by an ongoing political crisis in the country. The pandemic put on hold planned privatisations, like the sale of Croatia Airlines; delayed large infrastructure projects, such as the construction of highways and power plants; and pushed to the background most other issues.

Following is a wrapup of the impact of the pandemic on the economies in the SEE region by March 18 included.


As the first cases of the coronavirus were registered in SEE, analysts were quick to revise downward their projections for the region’s economic growth, already muted by fears of a global recession.

Austria’s Erste Bank lowered its economic growth forecast for Central and Eastern Europe (CEE) by 0.3 pp to 2.6% in 2020, noting that if the spread of the new coronavirus is not contained in the foreseeable future, global economic activity could decrease further, resulting in an even bigger slowdown. Country-specific revisions go from around 0.3pp in the cases of the Czech Republic, Hungary and Poland to as much as 0.5pp in Romania or even above in the case of Croatia.

Dutch banking and financial group ING too slashed its 2020 GDP growth outlook for four countries in the region.

ING cut its economic growth forecast to 1.2% for Croatia, 2.1% for Bulgaria, 3.9% for Serbia and 2.1% for Romania. Prior to the revision, ING expected GDP growth to be only a touch more modest in 2020 compared to 2019, projecting it to slow down to 3.6% from 4.1% in Romania, to 3.0% from 3.1% in Bulgaria, and down to 2.2% from 2.9% in Croatia. For Serbia it expected an acceleration to 4.7% in 2020 from 4.2% in 2019.

"However, as the best laid plans of mice and men often go astray, the outbreak of Covid-19 has rapidly changed the picture, leading us to a point where the term 'recession' does not seem inappropriate. That’s not to say we are there yet and – with a bit of luck and policy wisdom – we see a good chance for the four Balkan countries to avoid such a scenario," ING commented.

In Croatia, ING estimated that the economy is very exposed to an economic slowdown because of the largest share of tourism in the country's GDP, the weak industrial sector and the consumption-dependent growth model, considering that 2.1 percentage points of last year's 2.9% GDP growth was contributed by private consumption.

In Bulgaria, even though 2020 was supposed to be the year of entry in the European Exchange Rate Mechanism II (ERM II), the first formal step towards adopting the euro, the prospects of joining ERM II in the forthcoming months now look more distant, according to ING, even though there is no straightforward link between this topic and the coronavirus outbreak.

In Serbia, it commented, the growth structure is optimistic, with investments continuing to be the main driver, while capital inflows support the Serbian dinar, and inflation allows the central bank to lower borrowing costs. Strong domestic demand should be able to absorb the external shocks coming from Serbia’s main trading partners – Italy and Germany.

On the other hand, ING believes that Romania, the biggest economy in the region, will experience a serious slowdown this year, considering its growth structure and in view of the recent pandemic. "It is already well known that Romania burned through its fiscal buffers during very good economic times, which leaves the economy exposed to a downturn," the report noted. "Although we can hardly expect any meaningful fiscal consolidation to occur this year (due both to the Covid-19 impact and to the electoral context), there is no room for fiscal expansion either," the analysts said, pointing out to Romania's fiscal deficit of 4.64%/GDP in 2019.

Smaller economies in the region are likely to suffer as much as the big ones.

In Albania for instance, economic growth prospects dampened by a devastating earthquake that hit the country in November, are further aggravated by the recent global outbreak of the coronavirus, the International Monetary Fund (IMF) said, adding that this shock too will hit tourism. The magnitude of the slowdown is highly uncertain at this moment, the IMF added.


The uncertainty associated with the coronavirus in investment activity at the global and regional level and a possible distortion of distribution channels could also affect investment developments in Moldova, the country’s central bank said, motivating a cut in its key rate to 4.5%.

Its Serbian peer  followed suit and cut its key repo rate to 1.75% from 2.25%.

The Covid-19 outbreak, however, comes at a time when interest rates are already at record-low levels, making the European Central Bank reluctant to ease them further. It thus decided to keep interest rates unchanged amid ample liquidity on the markets.

Thankfully, banks in the region are largely perceived as stable, unlike ten years ago when the European sovereign debt crisis started.

Still, some money markets, the Croatian and Romanian ones in particular, were thrown off-balance.

"This uncertainty, as well as the growing fear of unfavourable outcomes, have caused at the end of February and in the first decade of March an extremely high volatility on the international financial markets, and an increased demand for foreign exchange in Croatia," Croatia's central bank, HNB, commented.

After almost four and a half years of no intervention on the market, HNB intervened three times between March 9 and March 13 alone, selling an overall 1.21 billion euro to help stabilise the kuna-euro exchange. Furthermore, on March 16 it placed 4.45 billion kuna ($643 million/586 million euro) with local banks in two repo auctions, to provide liquidity during the coronavirus crisis. The central bank also started buying government
bonds, aiming to maintain the stability of the government debt market.

Meanwhile in Romania, the leu continued to weaken against the euro, though its downslide should be attributed mostly to the ongoing political crisis in the country. On March 16 the central bank, BNR, set its reference exchange rate at 4.8242 lei ($1.09/0.99euro) per euro, the latest in a series of all-time lows since early February when parliament dismissed the liberal government led by Ludovic Orban in a no- confidence vote.

On the stock markets, increased volatility prompted sharp falls of the main indices in Bulgaria and Romania and halts in trading in Croatia and Macedonia after the Saudi price war on oil added to concerns about coronavirus-induced compressed demand.

Since the start of March, the blue-chip stock exchange indices in Bulgaria, Croatia and Romania have all suffered double-digit declines, as coronavirus-wary investors were further startled by the slump in global oil prices.

The Bulgarian Stock Exchange blue- chip SOFIX index fell most among the three – by 23.2%, closely followed by the Zagreb Stock Exchange benchmark CROBEX index, which erased 23.1% in the March 1-17 period. The Bucharest Stock Exchange saw the smallest decrease, by 17.1%, which came after the index traded at a 12-year high in February.

In an attempt to protect investors and ensure a high degree of transparency, the European Securities and Markets Authority (ESMA) asked the financial market participants to publish as soon as possible relevant information pertaining to the impact of the coronavirus on their operations. The local companies, however, have been wary in their response, sticking to general statements mostly, if issuing any at all.


As many as 74% of the managers of Romanian companies are considering lay-offs as their operations are impacted by the coronavirus outbreak, a survey by the Romanian Business Club, a local organisation of entrepreneurs, showed in mid-March. Some 40.5% of Romanian companies said they can maintain operations for up to a month on their own sources, while 35.5% expect to be able to stay afloat between three and six months if the crisis persists, according to the survey. The survey polled representatives of 200 companies whose combined annual turnover exceeds 60 million euro.

Tax reliefs are considered a solution by 44% of companies, while 23% believe that the state could back them with funding. Given the sudden nature of the coronavirus pandemic, only 30% of managers who took part in the survey said that they had a business strategy designed to help them overcome the crisis.

Two other organisations in the country, Romania’s Foreign Investors Council (FIC) and Concordia Employer Confederation, asked the government to postpone the payment of social contributions by employers for a period of three months, as this is by far their biggest expense, estimated at a total of 10 billion lei ($2.26 billion/2.06 billion euro) per month. Postponing the payment of social contributions will allow affected sectors to lay off as few employees as possible, they said in a joint letter.

Also, the government should come up quick with state-guaranteed loan schemes to support small and medium-sized businesses for which deferral of tax payments is not enough. Moreover, the government should extend or adapt state-guaranteed programmes so that banks can grant loans to clients temporarily affected by the coronavirus crisis. The two organisations are asking for specific measures for both retail and transport sectors in order to ensure continuous supply of food and medicines, gas, electricity and fuel to citizens. Investors and managers are also warning the government that the tourism sector is very exposed to the risk of bankruptcies and needs rapid intervention. In order to better protect employees, the two organisations propose to urgently update Romania's Labour Code in order to facilitate work from home or from a distance.

Similar proposals have been put on the table in other countries as well.

In Bulgaria the government said it plans measures to support employment by providing payment of 60% of the salaries of workers facing dismissal due to the impact of the coronavirus pandemic on businesses, if employers decide to keep those workers on payroll rather than lay them off. The support will be offered for a three-month period to cover 60% of the labour costs of affected business . It also plans to raise the capital of the Bulgarian Development Bank by 500 million levs ($280.6 million/255.6 million euro) in order to support businesses affected by the coronavirus pandemic.

In Croatia, the government said it plans to extend the deadlines for payment of taxes and loan repayment and provide tax refunds to companies and individuals faster than usual, aiming to provide more liquidity to help the economy weather the coronavirus crisis. At the same time, the government plans to introduce earlier reimbursement of overpaid taxes which typically takes place in August in Croatia.

Moreover, the head of Croatian Banking Association (HUB), Zdenko Adrovic, said, as uoted by local media, that local banks are considering a freeze on loan repayment for citizens and companies affected by a reduction or cancellation of business by the coronavirus epidemic. According to the proposal, banks will be able to delay the repayment of certain loans by 6 to 12 months without a need to set aside additional reserves for them, because these loans would be covered by a state guarantee.

Meanwhile, the European Commission proposed to direct 37 billion euro under its cohesion policy instruments to the fight against the coronavirus crisis and the European Investment Bank Group said it will rapidly mobilise up to 40 billion euro to fight crisis caused by Covid-19.


For its part, Serbia's government said it has decided to invest an additional 24 billion dinars ($225 million/203 million euro) in infrastructure projects in a bid to mitigate the risks of the coronavirus crisis on the country's economic growth, prime minister AnaBrnabic said, adding that the coronavirus crisis has also caused a delay of between 20 and 30 days in the implementation of large infrastructure projects across the country.

Other countries in the region too have reported delays in large scale infrastructure projects over the pandemic.

In Montenegro, the construction of Montenegro's Bar-Boljare motorway by China Road and Bridge Corporation (CRBC) is being delayed, Montenegrin media reported. About 800 Chinese workers engaged in the motorway construction are still in their home country due to the coronavirus epidemic, the director of motorway operator Monteput, Jonuz Mujevic, said in February. "The CRBC director will inform us how many of them will be able to return to the construction site. We have an aggravating circumstance because when they return, for a certain amount of time they will have to spend  quarantine, but we have all the assurances of the contractor that if there is any problem they will hire subcontractors," Mujevic said. CRBC is building the 41 km Smokovac- Matesevo section of the motorway, 83% of which has been completed.

In Bosnia’s Serb Republic the signing of the contract for the construction of the 160 MW hydro power plant (HPP) HE Dabar, in the southern Herzegovina region, has been delayed by a month due to the coronavirus outbreak in China, local media reported. A strategic investor for the implementation and financing of the 600 million marka ($339 million/307 million euro) HE Dabar was due to be selected by the end of February.


The automotive sector was the first to feel the impact of the coronavirus crisis because of its high exposure to China and Italy, the two countries worst hit by the pandemic so far.

Already in February a spokesperson of Fiat Chrysler Automobiles (FCA) said that the company plans to suspend production at its Serbian plant in Kragujevac due to the lack of supplies of electric parts from China caused by the coronavirus outbreak in the Asian country. The measure became a fact in mid-March. The suspension, which follows interruption in market demand caused by the coronavirus pandemic, will be in effect through March 27, the company said. Romania’s two major carmakers – Ford Romania and Dacia, followed suit in March.

The Romanian unit of U.S. car maker Ford Motor Company said on March 17 that it will temporarily halt production at its plant in Craiova starting March 19 and its employees will be sent in technological unemployment.

Dacia announced a day later that activity at its Mioveni production plant in Arges county will be halted between March 19 and April 5 due to the epidemic.

The blow on tourism and transport, air transport in particular, was even worse. By mid- March all countries in the region had either halted completely, or cut sharply passenger flights and several airports in Serbia and North Macedonia had closed down. Croatia's transport ministry said it is putting on hold the process of selecting a strategic partner for the planned recapitalisation of flag carrier Croatia Airlines due to the unfavourable impact of the coronavirus outbreak on the aviation industry.

Although tourism generates a high share of the gross domestic product (GDP) in most of countries, the situation is especially grave in Croatia.

Croatian blue-chip tourism companies Adris Grupa and Valamar Riviera said their bookings for March-May have been vastly cancelled due to the coronavirus infection,while bookings for June were less affected. Several other Croatian tourism companies and hotel operators listed on the Zagreb Stock Exchange (ZSE) said that most of their pre-season bookings, from March to end-May, have either been cancelled or fewer have been made compared to a year earlier. Furthermore, hotel operators, like Hoteli Maestral and FTB Turizam, have been forced to postpone or cancel the opening of new hotels that were planned to be ready for the upcoming summer season. Both operators have warned that even if the disease is brought under control by May, annual revenues will fall by no less than 30%. Hoteli Jadran reported cancellation of 40% of bookings for April and May, while Liburnia Hoteli said that 64% of its March bookings were cancelled, as well as 62% of those for April.


While the coronavirus pandemic hit hard across the region’s economies, it had some beneficial effects too.

As schools and universities closed, all remote learning platforms received a strong boost. The force majeure situation prompted the business to quickly find ways to streamline operations and allow for utmost flexibility in terms of working hours and work location. Companies were forced to quickly look for both technological solutions and alternative supply chains.

Moreover, the governments too are under pressure to revise labour codes in order to facilitate work from home or from a distance.

AIBEST, a Sofia-based independent industry organisation bringing together companies offering services related to business process outsourcing, information technology operations and knowledge process outsourcing and others, was one of the organisations that was quick to spot the opportunity. “AIBEST is ready to work together with the government and the institutions in charge to draft specific measures, including
technological ones, that would help the business and society deal with the restrictions and cut losses caused by COVID-19. Work from home, the introduction of flexible working hours, as well as fiscal stimuli for SMEs are only part of the initiatives which we are ready to discuss and draft together with the institutions in charge, the organisation said.

The effects are bound to boost efficiency long-term, hopefully beyond the time-scope of the pandemic.

(1 euro =  7.59065 kuna)