Tuesday, 11 February 2025

Emerging European economies navigate recovery and integration

5 min read

By Foo Boon Ping

Emerging European economies tackle debt, inflation and digital transformation.

Emerging European economies, encompassing countries such as Poland, Hungary, Romania and the Baltic states, are entering 2025 with cautious optimism. According to the International Monetary Fund (IMF), gross domestic product (GDP) of emerging markets in Europe are projected to grow at an average rate of 2.2%, benefiting from proximity to the Eurozone, robust manufacturing sectors, and increased digital integration. However, these economies face persistent challenges, including elevated inflation, public debt burdens, and geopolitical instability linked to the ongoing conflict in Ukraine.

The broader economic recovery is uneven, with countries like Poland and the Czech Republic outpacing others due to their integration into global supply chains, while nations such as Hungary and Bulgaria struggle with weak domestic demand and fiscal imbalances. Banks in the region are adapting to a complex landscape of rising credit risks, evolving regulations, and accelerated technological transformation, which are reshaping financial services and access across Central and Eastern Europe.

The IMF’s World Economic Outlook highlighted that emerging Europe’s growth prospects are supported by rebounding exports, infrastructure investment and the relocation of manufacturing hubs from Western Europe. Poland, for instance, is forecast to grow by 3.5% in 2025, buoyed by its dynamic IT sector and expanding automotive production. Romania is similarly expected to achieve 3.3% growth, driven by domestic consumption and European Union (EU)-backed infrastructure projects.

Inflation, however, remains a significant headwind. The region’s average inflation rate is forecast at 11.1% in 2025, with Turkey at 33%, Ukraine at 9% and Hungary at 3.5%, driven by lingering energy price pressures and supply chain disruptions. Central banks in Hungary and Romania have maintained aggressive interest rate policies, keeping benchmark rates above 10%, which has curbed inflation but also stifled private investment and household consumption.

Public debt levels are another pressing concern. Hungary and Croatia, with debt-to-GDP ratios exceeding 70%, face rising refinancing costs as global interest rates remain elevated. Banks with significant exposure to sovereign debt must carefully manage portfolio risks while navigating regulatory pressures to bolster capital adequacy.

Digital transformation and financial inclusion

The digital finance revolution is reshaping the banking landscape in emerging Europe, offering significant opportunities to enhance financial inclusion and efficiency. Poland, often hailed as a leader in fintech innovation, has embraced artificial intelligence (AI)-powered lending platforms, blockchain-based payment systems, and advanced open banking frameworks. The country’s digital payments sector grew by 20% year-on-year, supported by increasing smartphone penetration and a young, tech-savvy population.

However, disparities persist in the Western Balkans, where limited internet infrastructure and low financial literacy hinder digital adoption. In countries like Albania and Bosnia, less than 40% of adults have access to formal financial services, highlighting the need for targeted investments in digital infrastructure and literacy programmes. Banks are partnering with international organisations such as the European Bank for Reconstruction and Development (EBRD) to address these gaps through community-driven initiatives and microfinance programmes.

Opportunities for growth and regional integration

Emerging Europe is well-positioned to leverage green finance initiatives and regional integration efforts to drive long-term growth. The EU’s Green Deal Investment Plan, which allocates over EUR 1 trillion ($1.04 trillion) for sustainable projects by 2030, is creating opportunities for banks in Central and Eastern Europe to finance renewable energy projects, energy efficiency improvements, and sustainable transport systems. Green bond issuances in in countries like Poland are expected to surpass EUR 5 billion (about $5.15 billion) in 2025, reflecting growing investor demand for environmentally responsible financial products.

The region is also poised to benefit from infrastructure connectivity projects under the Three Seas Initiative, which aims to enhance energy, transport, and digital networks across, Adriatic and Black Sea regions. Banks in countries like Slovakia, Croatia and Lithuania are playing critical roles in mobilising private capital for these large-scale investments, aligning with EU climate and development goals.

Additionally, Ukraine’s post-war reconstruction is expected to be a significant driver of regional growth. The World Bank estimates that rebuilding efforts will require over $400 billion, with banks in neighbouring countries facilitating cross-border credit flows and project financing. This offers substantial opportunities for institutions with expertise in infrastructure financing and public-private partnerships.

Key risks and challenges

While opportunities abound, the region’s banking sector faces several risks that could undermine progress. Geopolitical instability remains a central concern, with the ongoing conflict in Ukraine disrupting trade routes, raising energy costs and increasing uncertainty in neighbouring markets.

Inflationary pressures continue to weigh on household and corporate borrowers, raising the likelihood of non-performing loans (NPLs). In Hungary, for example, NPL ratios are expected to increase by 15% in 2025, prompting banks to expand loan-loss provisions. Moreover, tighter monetary policies are constraining credit growth, particularly in sectors such as real estate and retail, where demand remains subdued.

Cybersecurity risks are another area of vulnerability, as the rapid digitisation of financial services has exposed banks to rising cyberattacks and data breaches. Strengthening cybersecurity infrastructure and implementing AI-driven threat detection systems will be critical for safeguarding financial stability. 



Region: Middle East
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