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Euromoney Country Risk

Country Risk: Eurozone crisis weighs heavily on CEE risk

Poland, Hungary, Russia and Bulgaria receive worsening scores for economic risk

The plight of the eurozone continues to affect the economies of Central and Eastern Europe. Economic risk scores across CEE have deteriorated since September as the crisis forces governments to lower growth forecasts, causing downward pressure on CEE assets and currencies. Scores in the economic assessment of Euromoney Country Risk’s survey have deteriorated for 11 economies in the region since September. The largest score declines have taken place in Slovenia, Belarus, Hungary, Bosnia-Herzegovina, Slovakia and Romania.

Romania’s overall economic score has declined by -0.6 points since September. Economists reduced their scores in the survey categories for economic growth (-0.1), monetary policy/currency stability (-0.1) and employment (-0.1) in October as the outlook for Romania’s export-driven economy deteriorated. Romania’s score in the government-finances category also worsened by -0.1 points, despite the government’s commitment to reduce the budget deficit to 3% of GDP in 2012.

CEE: Economic score deteriorations, Q4 2011
Economic Score Bank stability/risk Economic-GNP outlook Government finances
Belarus -0.7 -0.1 -0.2 -0.1
Hungary -0.5 0 -0.1 -0.1
Bosnia-Herzegovina -0.5 -0.1 -0.2 -0.2
Albania -0.4 0 -0.1 0
Slovenia -0.4 0 0 -0.2
Macedonia (FYR) -0.4 0.2 -0.1 0.1
Slovak Republic -0.3 0.1 -0.3 -0.1
Serbia -0.2 0.1 -0.1 0
Russia -0.2 0 -0.1 0
Bulgaria -0.1 -0.1 -0.1 0
Poland -0.1 0 -0.1 -0.1
Source: ECR (September 1st- November 9th, 2011)

Economic scores for Hungary have fallen by -0.93 points during the same period after it received reduced scores for economic outlook (-0.1), monetary policy (-0.1), employment (-0.1) and government finances (-0.1). Spreads on Hungarian CDS and bonds remain elevated as the economy continues to be hampered by high levels of corporate and household indebtedness, fiscal consolidation and stagnant economic growth. The Central Bank has been forced to raise interest rates repeatedly following the continued appreciation of the Swiss franc to relieve the pressure on indebted households and corporates. The ratings agencies have warned that Hungary’s investment grade rating could be threatened, while in October, Moody’s put seven Hungarian banks on review for possible downgrades. The governing Fidesz party’s controversial mortgage-relief programme, which includes measures to allow homeowners to repay bank loans at more than 20% below market rates, has further increased market anxiety. Correpondingly, Hungary’s overall score in the political risk section of the survey fell by -0.8 points, with declining scores in each of the survey’s six political categories, with the exception of corruption.

Economic scores for Poland have declined by -0.6 points since September. Scores for monetary policy/currency stability fell by -0.1 points in October after investor pull-back from emerging markets repeatedly forced the central bank to intervene to protect the zloty. With more than 27% of government debt denominated in foreign currencies, Poland’s score for government finances (-0.1) was also affected by its currency weakness.

Bulgaria’s economic score has declined by -0.5 points since September as the crisis in neighbouring Greece deepens. Economists reduced their scores for bank stability (-0.1), economic outlook (-0.1) and employment (-0.1), but left their scores unchanged for monetary policy/currency stability, indicating a level of confidence in Bulgaria’s ability to maintain its currency peg to the euro.

Among the states of the former Yugoslavia, Bosnia-Herzegovina (-0.9) and Croatia (-0.3) each received deteriorating scores for economic risk, while Serbia (+0.2), Macedonia (+0.5) and Albania (+0.5) improved scores in this category during the same period. Economic scores for Slovenia fell by -1.1 points – the largest decline in CEE during the period – with declining scores for monetary policy (-0.2) and government finances (-0.2).

In Turkey, economic scores improved marginally during the period, with higher scores for monetary policy/currency stability (+0.1). The recent shift in monetary policy by the central bank – abandoning its policy of low interest rates to ward off excessive hot money inflows – has succeeded in halting the lira’s long-term downward trend against the euro. The lira has since narrowed to 2.45 against the euro (as of November 9th) from a peak of 2.57. Turkey’s current account deficit, which reached a peak of $9.6 billion in March, has also narrowed sharply in recent months.

Economic scores for Russia have deteriorated by -0.5 points since September, after the country received reduced scores in the economic outlook (-0.1), monetary policy/currency stability (-0.1) and employment (-0.1) survey categories.

Among the Baltic states, Latvia (-0.2) registered an economic score decline, while economic scores for Estonia and Lithuania remained unchanged.

The average economic score for the region as a whole has deteriorated by -0.8 points since September.

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