CEE Demographics: Is Eastern Europe Dying Off?

Given all the news that pension reform is making in Eastern European countries, it’s easy to mistakenly believe that the problem is simply a holdover from ex-Communist pension systems. While their public pension systems certainly don’t help the cause, the real problem goes much deeper. Eastern Europe is unique as an emerging market as its demographic situation is more in line with developed markets than other emerging markets. Most emerging markets are projected to experience strong population growth in the coming decades, while Eastern Europe is currently experiencing negative population growth. This population decline is expected to dramatically increase national debt burdens throughout the region due to increased spending on pensions, healthcare and social services, creating a fiscal situation that will be unsustainable unless countries move forward with substantial reform of their pension systems.

The European continent is forecasted to share the same fate, but Europe’s population decline is being felt first and foremost in Eastern Europe. The United Nations projects that Eastern Europe’s population will decline by approximately 46.3 million people from its 1950 level by 2100, or a 21% decline in population. Considering that the populations of Asia and Africa are projected to grow 273.4% and 919.1% respectively over the same period, the Eastern Europe’s demographic situation does not look good.

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Source: Standard & Poor’s

Even though this is a long-term problem, it is not asymptomatic in the short-term. Demographics could have a negative impact on credit ratings if countries’ fiscal deficits expand and national debt burdens increase due to age-related spending. In December, both Moody’s and Fitch downgraded the sovereign credit rating of Hungary to one notch above “junk” following Hungary’s re-nationalization of its previously privatized pension system. Conversely, rating agencies have said that successful reforms of pension, healthcare and social systems in the Czech Republic could lead to an upgrade to its sovereign credit rating.

Aging populations are expected to lead to an explosion of public debt due to increases in spending for pensions, healthcare and long-term care. Standard & Poor’s forecasts that by 2050 the average net general public debt in Eastern Europe will to increase to 288% of GDP from an estimated 29.5% of GDP in 2010. At the extreme end, the net general public debt of Russia would balloon to 569.9% of GDP in 2050 from an estimated -3.4% of GDP in 2010 (and that’s the base case scenario). So Russia would go from a net creditor to an extreme debtor largely because of demographic problems. If government policies and programs are not adjusted to deal with the reality of the current situation, demographic decline could result in credit rating downgrades, higher costs of borrowing and decreased overall productivity.

The absolute population decline is due to low fertility rates rather than net migration, so it is a multi-generational problem with which countries have to deal. While some might blame emigration to higher-wage countries, especially Western Europe, the UN estimates that net migration has a negligible effect on the total population in Eastern European countries. These low fertility rates are leading to an aging population. While the number of retirees who utilize social benefits is increasing, the adult workforce whose taxes fund those social benefits is decreasing.

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Source: United Nations Statistics Division

A key metric of aging populations is the old-age dependency ratio, which is the number of persons aged 65 and over expressed as a percentage of the number of persons aged between 15 and 64. Eastern Europe is unique as an emerging market due to its aging population. The old-age dependency ratio of East Europe is forecasted to consistently be dramatically higher than that of Africa, Asia or South America. While Eastern Europe is attractive as an emerging market for reasons such as a well educated population, its aging population has to be a concern.

The demographic trends in Eastern Europe require governments to reform their pension, healthcare and social benefit systems. With a declining and aging population, the generous public benefit systems that exist in many countries throughout the region are not fiscally sustainable. If left unchecked, demographic decline could lead to lower credit ratings, increased debt burdens and higher costs of borrowing. Without reform Eastern Europe could end up in a fiscal situation that is more similar to that of the PIIGS today than other emerging markets. Reforms will not always be politically popular, but are necessary due to demographic decline that is forecasted to affect Eastern Europe for the next few generations.

One Response to "CEE Demographics: Is Eastern Europe Dying Off?"

  1. duanemiller   January 15, 2013 at 2:25 am

    For how long can population decline before the very idea of a nation state becomes untenable?