CEE update: Contagion from Ukraine unlikely to affect wider region

Jeremy Weltman
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Euromoney’s Country Risk Survey points to limited regional impact of the crisis in Ukraine, in spite of potential spill-over effects.

Disparate reactions to the civil unrest in Ukraine have seen the average country risk score for the 25 Central and Eastern European (CEE) sovereigns in the ECR survey remain unaffected in 2014.

The average score for the region has risen slightly in the year to date, to 45.75 out of 100. A higher score is indicative of lower risk in Euromoney’s methodology.

In the case of Ukraine, economists participating in the Euromoney survey had priced in the high risk of sovereign default months before the ousting of president Viktor Yanukovych occurred late last week. Ukraine’s economic woes have seen it rated in the lowest tier of the ECR rankings, tier five – among the world’s riskiest sovereigns – since Q4 2012.

The region’s score had fallen (by 0.6) in 2013 as the eurozone drag and the tapering of US liquidity imparted a chill wind across the region, pinching growth assumptions and complicating fiscal dynamics sufficiently to prompt risk aversion. However, other factors were also to blame.

Only 10 sovereigns have since seen their scores alter so far this year, making a larger reaction possible in the days ahead, yet these changes show diverse reactions to the perceived impact on the region’s sovereigns.

The effects are compounded by large differences in risk levels across the region. As of end-February, no fewer than 50 points separates top-ranking Czech Republic, on 68.6 points, from Tajikistan, on just 18.3.

Only 10 countries score more than half of the 100 points available, and seven – including Hungary – have experienced double-digit score declines since 2010.

Sixteen of the region’s sovereigns became riskier last year, including Cyprus, Moldova, Croatia, Slovenia and Ukraine, but not necessarily for the same reasons, with domestic and external influences overlapping.

Several became safer – among them Romania – while the Baltic states, perceived as more immune to the eastern chill, were also notable improvers during the period.

Ukraine: an isolated problem

One of several former CIS republics in tier five, Ukraine now ranks 125th on a lowly score of 31.8, dragged down by its political and external financing problems.

The troubled nation’s risks have naturally risen further in recent weeks in response to the ensuing turmoil, especially with question marks raised over its very existence as a single entity, and its financing problems warning of a payments shock.

However, Ukraine’s score has been falling for the past two years, as risk experts have become concerned by its prospects. The sovereign’s capital repatriation risks had been rising in concert with fears over government stability, policymaking and other features, including the ailing economy – with all five of its economic risk factors downgraded in 2013.

Alarm bells have been ringing for several years over Ukraine’s lack of economic growth, and the large fiscal and external balances creating financing problems and pushing the currency downwards to forewarn of inflation danger.

Vasily Astrov, senior economist at the Vienna Institute for International Economic Studies, says: “The Ukrainian case is rather specific. The current strong hryvnia depreciation and the looming balance-of-payments crisis are basically because Russian credits have been suspended, and it is not clear whether and when there will be an alternative rescue package of a similar magnitude from the west/IMF.

“I do not see why this should have any impact on the neighbouring countries. The only exception may be Moldova, which is planning to sign an association agreement with the EU later this year. The story may become politically similar to the one in Ukraine due to Russian counter-pressure and possible trade sanctions.”

Moldova’s score plunged 4.2 points to a measly 28.6 last year. The tier-five sovereign ranks 140th, more than 20 places lower than a year ago, making it riskier than Ukraine.

Constantin Gurdgiev, a professor at Trinity College, Dublin, concurs, saying: “Ukraine’s economy is relatively poorly integrated into regional and global markets, reducing the potential for economic shocks in Ukraine to spread across the region.

Both experts single out Moldova, and also Belarus, for any political crisis contagion. The latter is another high-risk, tier-five country, languishing at 145th in the global rankings.

Confidence in top-rated CEE sovereigns maintained

The ECR survey results suggest the effects of the Ukrainian crisis are likely to be limited on the region’s highest-rated countries: the Czech and Slovak Republics, Poland and Estonia.

Each of these countries is ranked in the second tier of the ECR rankings alongside OECD member states and predominantly A-to AA rated sovereigns.

None of the region’s safe havens is experiencing civil unrest, such as that seen in Ukraine, and neither are there particularly strong trade or financial links to merit concerns.