Baltic economies face threat from weakness in GBP

The Central and Eastern Europe (CEE) is likely to face threats, following the weakness in pound and continued slide in the currency. Within CEE, Poland, Hungary and Romania as well as the Baltic countries are exposed to GBP's weakness.

Income transfers and worker remittances from the United Kingdom constitute 5 to 6 percent of all income receipts and often 10-20 percent of the current account balances of emerging markets around Europe. Weakness in the GBP keeps the value of this component under pressure, in domestic currency terms, which is expected to negatively affect the current account balance, exchange rate and risk spreads.

In the midst of economic and political turmoil threatening the spheres of the global economy, investors remain concerned about three major impacts that are expected to channelize in to the CEE, through the Brexit pipeline. Reduced trade, reduced EU budgets and reduced investment activity (from uncertainty), are the three concerns that the investors are worried about.

"We have revised up our central EUR-PLN forecast from 4.25 to 4.45. For EUR-PLN, we earlier expected wide volatility around a central 4.25 level; the volatility would be driven by domestic political noise; now we expect volatility around a higher 4.45 level," Commerzbank said in its latest research note.

Meanwhile, apart from these three risks threatening the CEE economy, Brexit is a major component of concern that is throttling almost every economy in the current scenario. Although it seems obvious that a weakness in the GBP would dramatically drown the trade prospects between UK and the CEE or those migrant workers will suffer the most in the case of an extreme political unrest, the end result may prove current market speculations go wrong.

However, one impact that is ought to happen in the short run is the sharp appreciation of CEE currencies against the GBP which will pressurize the significant trade surpluses, which CEE countries maintain with the UK. In particular, the value of worker remittances and income transfers from the UK to the CEE constitute a chunky 10-20 percent of the current account balances of key CEE countries, Commerzbank reported.