Investors in Eastern Europe Little Bothered by Brexit's Impact

Analysts are worried that a U.K. exit from the European Union will hit the Eastern European countries whose nationals work in Britain.

But so far, investors have yet to share that concern.

Last week, Commerzbank cut its exposure to bonds in countries such as Poland and Hungary, countries that have large populations of workers living in the U.K.

Other banks have expressed gloomy views about Polish and Hungarian debt and currencies as well, citing the importance of EU funds for the development of these countries.

Still, there are few signs that recent moves in these markets have much to do with so-called Brexit.

Trading in the Polish zloty and Hungarian forint has shown no connection with the pound. Indeed, both have gained against sterling in recent months, like most currencies.

Yields on Polish 10-year sovereign bonds have edged up over the last month, in a move that could indicate investor’s concerns over these assets. But the cause of that decline seems to be more about Poland’s central bank than Britain’s referendum.

Investors believe that the National Bank of Poland will slash borrowing costs less than once thought, pushing up yields. The NBP last cut in early 2015 as it, like other central banks, tried to stoke inflation. But inflation has fallen further since and the Polish central bank has not cut.

Concerns over credit quality in Poland and Hungary have also shown few signs of increasing, when judged by derivatives called credit default swaps. Both countries have fared better than Germany, Europe’s largest economy.

Any concerns ratings agency Standard & Poor's has had over Poland, have been mainly related to domestic policy.

There's still some reason to believe Brexit would hurt Eastern European nations if trade links with the U.K. are hit. This is especially true for Poland, which sells more than 13% of its exports to Britain. In Hungary, it's less than 4%.

But the importance of money sent back home by Polish and Hungarian migrants working in the U.K., often cited as a chief concern, may be overstated. Remittances back to Poland are about 50% larger than investment inflows into the country, including foreign direct investment and returns from investments overseas. Remittances are about 40% bigger than investment flows in Hungary.

But of those remittance flows, the U.K. makes up just 16% and 9% in Poland and Hungary respectively, data from the World Bank shows.

While subsidies from the EU are another crucial source of funds for Eastern Europe, the loss of the U.K. would only take out a net €1 billion a year for both. These subsidies are also guaranteed until 2020, even if the U.K. does leave the EU.

In the short term, at least, it seems investors in Poland and Hungary can sleep tight at night.