(The following statement was released by the ratings agency)
Aug 28 - Fitch Ratings says in a new report published today
that the economic and credit outlook for the Emerging Europe
(EE) region is worsening as it faces the combination of a
global economic slowdown, strong inflationary pressures and
fragile financing conditions, while many EE countries also have
sizeable current account deficits (CADs).
"The economic and credit outlook for Emerging Europe is
deteriorating as an unpalatable combination of a downturn in
the euro area, maturing domestic booms and the global commodity
price shock presages a worse growth/ inflation/ current account
trade-off across the region; while global financing conditions
are fragile," says Edward Parker, Head of Emerging Europe
Sovereigns at Fitch. "Although not Fitch's central scenario,
the risk of a hard landing accompanied by an exchange rate
crisis somewhere in the region is significant and rising," says
Mr Parker.
Previous upward rating momentum in the region has stalled.
Over the past 18 months there have only been three foreign
currency rating upgrades: the Czech Republic ("A+"), Slovakia
("A+") and Armenia ("BB"); and two downgrades: Latvia ("BBB+")
and Georgia ("B+"). "The balance of Positive to Negative
Outlooks has swung from plus five in August 2007 to minus five
in August 2008, highlighting the downward pressure on ratings.
Seven countries are now on Negative Outlooks, which is a record
number since Fitch started its sovereign coverage on the region
in the mid-1990s," says Mr Parker.
Fitch forecasts EE's GDP growth to fall from 6.9% in 2007
to 5.8% in 2008 (the lowest since 2002) and 5.3% in 2009,
bolstered by growth in Russia ("BBB+") of 7.5% this year and
6.5% next. But most countries within the region will grow much
slower, and Estonia ("A") and Latvia are at risk of recession.
Meanwhile, the spike in commodity prices has unleashed a surge
in inflation when many countries were starting to run up
against capacity constraints and overheat after years of rapid
monetary and GDP growth. Inflation has been highest in
countries with fixed or managed exchange rates including the
Baltic States, Bulgaria ("BBB"), Kazakhstan ("BBB"), Russia and
Ukraine ("BB-"); and best contained in the inflation-targeting
central European economies. High and volatile inflation
increases the risk of exchange rate and banking crises, and
reduces debt tolerance.
Substantial CADs are a significant credit concern across
much of EE - and one that has been heightened by the credit
crunch. This was the primary reason Fitch revised the rating
Outlooks to Negative from Stable on Bulgaria, Estonia, Latvia
and Romania ("BBB") in January, following Lithuania ("A") in
December. In the report, Fitch has constructed an index of
relative vulnerability to external financing pressures, based
on its projections of CA balance plus FDI, external debt
repayments due this year and net external debt stocks. Latvia,
Croatia ("BBB-"), Lithuania, Turkey ("BB-"), Estonia, Bulgaria
and Romania come out as most vulnerable on this measure.
EE sovereign external bond issuance at USD14bn year-to-date
has already surpassed last year's total of USD13bn. However,
although private sector external bond issuance picked up in
H108 on H207, it is still well below pre-credit crunch volumes.
The rapid pace of bank credit growth in the region is slowing,
but remains elevated in parts of the CIS and Balkans. Foreign
parent banks should continue to support access to funding and
confidence in local banks, but there is a tail risk that a
worsening of the international credit crunch could trigger a
fall in the availability of their financing to EE banks.
The war between Russia and Georgia, and Russia's tense
relations with many of its neighbours and the West has added
another layer of risk to the region at an inopportune time.
Aside from Georgia, which is on a Negative Outlook, Fitch does
not currently expect these developments to trigger any rating
changes for Russia or other countries. However, this is not
impossible should events lead to a marked reduction in FDI and
other capital inflows, seriously disrupt trade and economic
activity, heighten domestic political instability or heat up
other post-Soviet frozen conflicts.
The full report, entitled "Emerging Europe Sovereign
Review: 2008", is available on the agency's subscription
website at www.fitchratings.com
