Weakness in GBP likely to weigh on outlook of CEE economies

The Central and Eastern European (CEE) region 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.

"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.

In the midst of economic and political turmoil threatening global economy, investors are wary of three major impacts that are expected to impact the CEE, via Brexit. Reduced trade, reduced EU budgets and reduced investment activity (from uncertainty) are three main concerns that the investors are worried about.

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 to 20 percent of the current account balances of key CEE countries, Commerzbank reported.

Meanwhile, apart from these three risks threatening the CEE economy, Brexit is a major concern that keeps almost every economy on edge.

Although it seems obvious that a weakness in the GBP would dramatically drown the trade prospects between the 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 the current market speculations to go wrong.