ECR Q3 Results: Estonia the safest economy in CEE; Poland and Czech Republic deteriorate

Matthew Turner
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The latest results from the Euromoney Country Risk survey show that the Baltic States continue to climb the ECR global rankings. Estonia’s risk outlook has improved significantly since the global financial crisis, with the country now considered the safest in CEE.

But the some of the region’s largest economies– Czech Republic, Slovakia, Poland and Hungary - have seen their ECR rankings deteriorate over the same period, signalling that CEE’s own version of austerity may be having a negative impact on its growth outlook. 

Estonia rises to the top

ECR data show that Estonia has now overtaken Czech Republic, to become the safest economy in Central and Eastern Europe (CEE). Estonia’s ECR score improved by 2.7 points (out of 100) to 70.8 in Q3 2012, leaving the sovereign ranked among the 25 safest investment destinations globally, ahead of Kuwait, South Korea and Japan. 

source: Euromoney Country Risk

Estonia’s climb in the ECR rankings can be attributed to strong improvements across the sovereign’s economic and political assessment scores, which increased by 0.4 and 0.2 points respectively.

ECR experts recorded gains across the country’s government finances, and monetary policy and currency stability indicators. In addition, the sovereign’s bank-stability indicator (6.4 points) remains unaltered since Q1 2012, a positive comparison with other CEE and EU member states, which have seen further deterioration in their bank-stability indicators.

source: Euromoney Country Risk

Tiina Helenius, an economist at Handelsbanken and an expert member of ECR, points out that Estonia’s rise stems from a “good handling of the financial crisis, [allowing] the economy to grow and the banks to remain standing on their own”.

Tiina explains: “The public finances are in very good shape, they have little public debt and the country has a solid standing in the financial markets. Estonia’s economy has incredible wage flexibility and a flat tax rate, providing them with the flexibility to grow through the adjustments that took place in public and private sector wages. This has now made them much more competitive in attracting foreign investment.”

Estonia’s accession to the euro in January 2011 is another factor that has helped the country regain the confidence of foreign investors.

Estonia has come a long way in ECR’s rankings, climbing more than 100 places since March 1993, when the survey was first published. Estonia’s climb is testament to the stability of the political landscape that has come from the successful democratic transition the country undertook in the 1990s and the market-friendly policies deployed by successive governments.

source: Euromoney Country Risk

Baltic States – highest risers in Q3 ECR rankings:

Estonia’s neighbours Latvia and Lithuania have also benefited from improved ECR scores in Q3 2012, according to analysts.

Lithuania recorded the largest rise on the ECR rankings of any country in the region. The sovereign climbed seven places to 48 in Q3, leaving it 10 places ahead of the nearest ranked CEE sovereign, Croatia. This was due to Lithuania’s ECR score improving by 2.1 points to 57.3.

Latvia saw a marked improvement in its overall ECR score, increasing by 1.7 points to 48.7 in Q3 2012.

Lithuania saw improvements across its employment, bank-stability and economic-outlook indicators, while ECR experts recorded gains across Latvia’s monetary/currency stability indicator.

Both countries benefited from substantial improvements in Euromoney’s access to bank capital and capital markets survey. Lithuania and Latvia’s scores in Euromoney’s access to capital markets indicator (ATCM), which measures the ease with which a country can access bank financing, improved by 1.7 points between March and October 2012.

source: Euromoney Country Risk

The risk outlooks for Latvia and Lithuania’s have improved markedly since the beginning of the global financial crisis, when both countries were on the edge of default after a sharp nominal depreciation, which impacted negatively on economic growth and risk perception for both countries. Latvia experienced a GDP decline of almost 25%, with unemployment surging from 6% to 21% in 2011. 

ECR data shows that Latvia’s rank plummeted to a lowly 77 in the ECR rankings in March 2010, while Lithuania was not far ahead in September 2009 – with a rank of 63. The improvement on the ECR rankings since then might be indicative of the successful fiscal consolidation efforts both countries have implemented since the downturn began.

Nerijus Maciulis, an ECR expert member and chief economist at Swedbank, Lithuania, says: “In 2009, there was speculation over the devaluation of these currencies. Now, the peg provides stability and confidence which helps attract FDI. Latvia also meets all the criteria for accession into the euro for 2014.