Weaker growth outlook adds to fiscal constraints
We expect the economy to stall in 4Q20 vs. the previous +0.9% q/q growth due to weaker external demand, offsetting the domestic improvement suggested by our high frequency index in the first half of the quarter. Mobility restrictions vary across local administrations depending on the infection rate and are overall milder relative to CEE peers. Given the carryover effect of 4Q20 GDP growth into next year, we revised down our 2021 growth forecast to 2.7% y/y from 3.9%, while upgrading our 2022 estimate to 4.5% from 3.7% on larger inflows of EU funds starting 2H21. After the general election on December 6, the focus into year-end should shift to swiftly adopting the 2021 budget bill, a step being closely watched by market participants and rating agencies.
With almost four years ahead without any scheduled elections, the new government, regardless of its political orientation, is likely to frontload unpopular measures, in order to increase its fiscal room and be able to reap the benefits of early reforms. Both major political parties are targeting, in their electoral programs, a budget deficit within the EDP 3.0% of GDP limit in 2024. This could be perceived as complacency by rating agencies, as the debt-to-GDP ratio is likely to peak in 2023. EU funds and a potentially higher growth multiplier, given the weaker economic backdrop, should help GDP growth average around 4.8% over the 2022-25 period.