CEE Q4 results: disparate risks cause tier shifts across the region

Jeremy Weltman
Published on:

Risk levels increased across the Central and Eastern Europe (CEE) region during the fourth quarter of 2012, as economists continued to take stock of trade and financial linkages to the debt-ridden eurozone, and became more wary of the political and structural elements to the crisis, Jeremy Weltman reports.

However, the region’s performance varied in 2012: those countries with more severe problems fell out of favour – Cyprus and Slovenia dropped into tier two and Hungary slumped to the brink of tier four; Estonia, by contrast, remained the region’s strongest option, one of four star performers in tier two.

Indebted eurozone participants Cyprus and Slovenia were among 13 of the 18 sovereigns dotted across the CEE region – excluding the Commonwealth of Independent States – to have seen their Euromoney Country Risk scores decline between Q3 and Q4, and which lost their status among the top rankings for the region (tier two).

The survey apportions countries into five tiers, according to their risk scores, which are supposed to correspond to their credit ratings (see: ECR’s tiered groups explained). Now only four countries remain in tier two: Estonia, the Czech and Slovak Republics, and Poland. Seven are now to be found in tier three, five in tier four and high-risk Montenegro and Bosnia-Herzegovina remain anchored in tier five.

For some countries, the changes in risk perceptions witnessed during the final months of last year continued trends that were apparent throughout 2012, and that extend even further back in many cases.

For others, they simply mark corrections stemming from the general deterioration in economic prospects in export markets and the associated political and/or structural risks reverberating around Europe as the continent grapples with its sovereign debt and banking-sector problems.

These altering risk perceptions and shifting tier rankings provide important food for thought as the region faces up to its borrowing requirements this year (CEE’s big four to conquer 2013 debt wall).

The region, it seems, is still coming to terms with the eurozone crisis and its effects, particularly as growth prospects have faded again. Many of the core CEE countries are heavily dependent on the eurozone and/or the wider EU for the majority of their export earnings, which invariably has a substantial impact on economic growth, government revenue and external balances.

Terms-of-trade shocks can damage currency stability and complicate fiscal sustainability. These are just some of the 15 economic, political and structural factors that experts taking part in Euromoney’s Country Risk Survey are asked to reassess each quarter.

European parent banks, too, have not so much withdrawn from the region per se, but have tightened their lending standards and reined back on the core activities of their CEE subsidiaries – including the financing of euro trade credits – in light of the prevailing market risks, wholesale funding difficulties and increased regulations imposed on the financial sector. Businesses and households have suffered from reduced credit availability as a result.

Yet the region remains essentially quite diverse, with 18 countries spanning four of ECR’s five risk tiers. By the end of 2012, 46.6 points separated tier five and IMF-dependent, Bosnia-Herzegovina in 153rd position out of 185 countries on Euromoney’s global risk data table from Estonia, a tier-two sovereign in 23rd position, and a relative bastion of fiscal prudence.

Estonia still the experts’ favourite

Confidence in the Baltics improved last year, which might be attributable in part to the close trade and financial links between Estonia, Latvia and Lithuania on the one hand, and super-safe Sweden and Finland on the other – ranked number four and six respectively in the global rankings. The Baltics enjoyed strong growth during Q3 2012, with exporters gaining market share due to improving competitiveness.

However, Estonia remains in a league of its own. A comfortable tier-two sovereign, the borrower slipped one place in the rankings during Q4, but it climbed four places last year (to 23rd) and is 28 places higher than in 2010, a remarkable rise. Upgraded scores for government stability, government payments/repatriation and soft infrastructure were notched up in 2012 and will have buttressed investor optimism.

There are still weaknesses in Estonia’s fiscal framework, according to the OECD, which could be improved by a multi-year public spending ceiling and an independent fiscal council. However, the sovereign is enjoying positive economic growth, has a small general government deficit (estimated at 1% of GDP at the end of 2012) and a remarkably low level of gross (EU) debt – around 15% of GDP or thereabouts – which must be the envy of many European borrowers.

The ECR score differential between deteriorating France and improving Estonia has narrowed from 20.4 points in 2010 to just 2.2 points at the end of last year, a trend that does not seem to support the disparity in credit ratings any longer.

Fitch still regards France as a triple-A sovereign – albeit on review for a downgrade – with Estonia at a mere A+ stable. ECR has previously remarked on the likelihood of a downgrade for the former (Will the UK, France and US lose their remaining triple-A ratings in 2013?), but is there also a case for Estonia to be ranked Aa across the board? Its ranking would suggest so, particularly with double-A rated Kuwait and Belgium now only fractionally above Estonia on the scoreboard.