S&P: Protectionism could drive automotive nearshoring to Central and Eastern Europe

Rising global trade protectionism and nearshoring trends in the European Union may encourage Western European automotive manufacturers to shift more production to Central and Eastern Europe (CEE), according to a report by S&P Global Ratings. This shift is seen as a strategy to mitigate geopolitical risks and reduce operational costs, which could, in turn, boost business activity for local banks in the region.

S&P highlighted that structural changes in global trade and the transition to electric vehicles present significant opportunities for CEE countries. Increased nearshoring could position the region as an attractive destination for production relocations, strengthening its industrial base and benefiting local financial institutions.

Hungary and Serbia, in particular, are positioned to attract increased investment from Chinese companies in battery production for electric vehicles (EVs). However, EU tariffs on EVs may act as a barrier to these opportunities. Notably, some large Chinese banks operating in the CEE region are actively monitoring these developments, signaling potential growth in investment flows.

Despite the opportunities, the automotive sector faces considerable challenges. Uncertainty around potential U.S. tariffs on imported light vehicles, stricter EU CO2 emissions regulations for passenger and commercial vehicles from 2025, and intense competition from Chinese manufacturers in Europe are expected to weigh on the sector’s prospects.

S&P anticipates that CEE banks will closely monitor credit exposure to the automotive sector and related industries. While further tensions in the automotive sector could result in additional credit losses, particularly among suppliers, the agency noted that most Original Equipment Manufacturers (OEMs) in the region maintain strong balance sheets and solid debt servicing capabilities. Credit activities in the sector are expected to remain stable due to well-defined risk limits and robust risk management practices, often aligned with the standards of Western European parent banks.

Direct exposure of CEE banks to the automotive industry accounts for about 3-5% of total corporate loans, but a significant downturn could indirectly affect the region’s broader economy and the quality of bank assets. However, S&P emphasized that banks in the region are well-capitalized, profitable, and equipped with improved asset quality, providing a strong foundation to weather potential shocks.

The automotive industry remains vital to the CEE region, contributing approximately 5-10% of GDP and accounting for 4.1% of gross value added (GVA) in 2023, compared with 3.1% in the EU overall. About 5% of the region’s working-age population is employed in the sector, highlighting its economic significance.

Countries such as Slovakia (6.6% of automotive GVA in 2023), the Czech Republic (5.6%), Hungary (4.5%), and Romania (4.5%) play critical roles as key exporters of vehicles and components to Western Europe. The report underscored the importance of Western European OEMs’ large-scale production facilities in sustaining the region’s industrial and economic landscape.

S&P concludes that while the CEE automotive sector faces headwinds, the region’s strong banking systems and potential government support in times of stress—similar to measures taken during the COVID-19 pandemic—will likely cushion the impact of any disruptions. The growing trend of nearshoring and EV production investments further underscores the region’s strategic importance in the global automotive landscape.

Source: S&P and ISBnews