Emerging and developing Europe enters 2026 in a phase of stabilisation rather than recovery. The International Monetary Fund (IMF), in its January 2026 forecast, projects real GDP growth to slow sharply from 3.5% in 2024 to 2.0% in 2025, before recovering modestly to 2.3% in 2026 and 2.4% in 2027, upgraded from October 2025. This trajectory reflects a region adjusting to post-inflation normalisation, geopolitical disruption and tighter policy frameworks, rather than one benefiting from cyclical tailwinds. For banks, the implication is not deteriorating fundamentals but a structurally more constrained operating environment, in which resilience depends less on macro momentum and more on balance-sheet discipline, funding stability and execution quality. Growth volatility reshapes credit visibility The IMF emphasises that growth outcomes across emerging and developing Europe remain uneven, driven by sharp divergence across countries and sectors rather than broad-based momentum. A sharp deceleration in Russia following fiscal-spending front-loading in 2024 weighs on the regional aggregate in 2025 and 2026, while Türkiye’s upwardly revised growth outlook provides a partial offset. In central and eastern Europe, including Poland, Hungary and Romania, growth remains positive but increasingly exposed to subdued global trade conditions and slower external momentum, consistent with the IMF’s projection of weaker world trade growth. For banks, volatility matters more than the absolute level of growth. In Russia and Ukraine, wartime distortions and fiscal dynamics continue to generate abrupt shifts in activity, complicating credit planning and sectoral exposure management. In Türkiye, macro rebalancing and tighter policy frameworks support growth normalisation but require banks to adjust to slower credit expansion and heightened sensitivity to confidence and funding conditions. In central Europe, where activity is closely tied to manufacturing exports, weaker external demand reduces the visibility of corporate cash flows, while household balance sheets have been more insulated as inflation eases. External demand and trade as binding constraints External exposure remains a defining constraint on the regional outlook. The IMF expects global trade volume growth to slow from around 4.1% in 2025 to 2.6% in 2026, limiting export momentum. For emerging and developing Europe, which is structurally more trade-open than advanced European economies, this limits the scope for a renewed export-led acceleration. The impact varies by economic structure. Manufacturing-oriented economies in central and eastern Europe are deeply integrated into euro-area supply chains, leaving activity sensitive to European industrial demand and inventory cycles. This exposure is compounded by adjustment within energy-intensive manufacturing, where higher and more volatile energy costs, alongside the transition towards electric vehicles, increase uncertainty around investment timing and supplier demand. In contrast, Western Balkan economies including Serbia, Bosnia and Herzegovina and North Macedonia rely more heavily on regional trade, remittances and foreign investment, leaving domestic activity more sensitive to confidence and financing conditions. Türkiye occupies a distinct position, combining diversified trade links with elevated sensitivity to global financial conditions and shifts in investor sentiment. Disinflation eases pressure, but funding remains restrictive Inflation across emerging and developing Europe has eased materially from the peaks of 2022–23. The IMF projects average inflation to fall from 13.5% in 2025 to 9.3% in 2026 and 7.4% in 2027, supported by tighter monetary policy and lower energy prices. This disinflation reduces pressure on household and corporate balance sheets and supports credit quality. However, the IMF does not anticipate a rapid shift to accommodative monetary conditions. Central banks in emerging Europe continue to prioritise credibility and exchange-rate stability, reflecting higher currency pass-through and narrower margins for policy error than in advanced economies. This remains particularly relevant in Türkiye and parts of south-eastern Europe, where exchange-rate dynamics play a central role in financial stability. For banks, funding costs remain structurally higher than in the pre-pandemic period, and the transmission of rate cuts to net interest margins is uneven. Moody’s Ratings’ Global Banks 2026 Outlook notes that while easing monetary conditions support broadly benign credit conditions, margin outcomes increasingly depend on deposit repricing, funding mix and liability management rather than policy tailwinds alone. Fiscal constraint and sovereign exposure Fiscal position is a second key transmission channel linking macro conditions to banking stability. The IMF projects that general government deficits across emerging and developing Europe remain elevated through 2027, while gross public debt rises from around 35% of GDP in 2024 to over 40% by 2027. Higher interest costs, defence spending and social pressures constrain fiscal consolidation. The implications differ across systems. In central European economies such as Poland and Romania, higher borrowing needs increase sensitivity to market conditions but are partly offset by deeper domestic financial markets and broader investor bases. In the Western Balkans, narrower fiscal buffers and smaller local markets amplify the importance of confidence and external financing. In Russia and Ukraine, fiscal dynamics remain closely tied to geopolitical conditions, while in Türkiye, fiscal credibility interacts directly with inflation expectations and investor sentiment. For banks, persistent fiscal pressure matters even without acute sovereign stress. Domestic government bonds play a central role as liquidity buffers, collateral and pricing benchmarks, increasing sensitivity to yield volatility and confidence-driven repricing, particularly in smaller and less liquid markets. External financing and currency channels External exposure remains a structural vulnerability. The IMF projects current account balances across emerging and developing Europe to remain modestly negative through 2026, underscoring continued reliance on external financing. While deficits are manageable, they leave economies sensitive to shifts in global risk appetite, interest rates and capital flows. Exposure varies by funding structure. Economies with greater reliance on portfolio inflows or foreign-currency funding, including Türkiye and parts of the Western Balkans, are more exposed to swings in global financial conditions. Central European economies benefit from deeper local-currency markets and stronger parent-bank support, but remain vulnerable to abrupt shifts in investor sentiment. Moody’s highlights that geopolitical tensions, particularly related to Ukraine, continue to contribute to currency volatility and investment uncertainty, increasing operational complexity for cross-border banking activity. For banks, resilience depends on conservative liquidity buffers, prudent foreign-exchange risk management and realistic assumptions about external funding availability. Banking performance under stabilisation Against this backdrop, bank-level indicators point to adjustment rather than stress. Lending growth is expected to moderate from the rapid expansion of 2021–23 but remain positive through 2026. Loan-to-deposit ratios remain broadly stable, reflecting disciplined funding practices, while returns on assets normalise as the benefits of the rate cycle fade. Asset quality remains broadly resilient, with non-performing loan ratios edging up only modestly. The IMF indicates that household balance sheets across much of central Europe continue to provide a stabilising buffer for retail credit, while banks in smaller economies remain more exposed to sector-specific shocks. Provision coverage ratios are expected to decline gradually, reflecting normalisation rather than deterioration. Moody’s expects credit conditions to remain broadly benign in 2026, even as geopolitical, fiscal and trade pressures weigh unevenly across markets. Profitability increasingly depends on execution. Fee and commission income from transaction banking, payments and advisory services plays a larger role as margin expansion slows, reinforcing the importance of cost control and pricing discipline in fragmented operating environments. Digitalisation as operational discipline Digitalisation and the use of data, automation and increasingly AI are becoming more important, but primarily as tools to improve efficiency, manage costs and strengthen risk control rather than as drivers of rapid growth. Moody’s analysis highlights that banks are deploying digital channels to support operating discipline and resilience, with outcomes highly dependent on execution quality and balance-sheet capacity. In markets with fragmented branch networks or lower financial penetration, including parts of the Western Balkans and Moldova, digital tools extend operational reach and support financial inclusion. However, legacy systems, fragmented regulation and resource constraints limit productivity gains and raise governance risks, reinforcing digitalisation as a structural necessity rather than a source of upside. Disciplined execution defines resilience Emerging and developing Europe’s banking systems enter 2026 in a more stable position than in the early 2020s. Inflation has eased, growth has stabilised and balance sheets remain sound. Yet the IMF makes clear that this stability is conditional. Growth volatility persists, fiscal space is constrained and external exposure remains a defining vulnerability, with material differences across countries. The IMF further cautions that this baseline remains highly sensitive to geopolitical escalation, with a renewed intensification of the Ukraine war or a sharp deterioration in EU–China trade relations posing material downside risks that could quickly overwhelm balance-sheet execution. For banks, the defining challenge in 2026 is not expansion but credibility. The ability to manage sovereign exposure, maintain funding resilience and operate effectively amid external shocks will shape performance more than cyclical tailwinds. Moody’s assessment reinforces that profitability and asset quality increasingly depend on disciplined execution rather than macro acceleration. Read the full publication.
