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.

“The operational fiscal austerity law, which curbs spending in the government budget, means there are fewer risks that public finances will spiral out of control. Now structural budget deficit is 2% of GDP, which is a more sustainable level. There is no reason to increase spending as overall budget will not be balanced until 2015.”

Central Europe succumbs to increased risk as austerity begins to bite

 The members of the Visegrád Group – Czech Republic, Poland, Hungary and Slovakia – have all seen increases in risk sentiment in Q3, a sign perhaps that the region’s own version of austerity has taken an icy hold on its outlook for growth. This view is supported by data from the survey’s economic component, which shows that all four countries witnessed a decrease in economic outlook/GNP indicator scores in Q3 – adding to the overall decline in ECR scores for each country. 

source: Euromoney Country Risk

The Czech Republic and Slovakia experienced substantial downward trends in their overall ECR score’s in Q3 2012.

Czech Republic’s ECR score fell by 1.0 points to 69.9 in Q3 2012. Score decreases were recorded across the sovereign’s economic and political assessment criteria. Of most concern to ECR analysts in Q3 was the country’s economic assessment, which recorded the largest fall out of the three main assessment components, covered in the ECR survey. These score decreases have left Czech Republic slipping to second position in the CEE rankings.

The Czech Republic’s economy has been in a recession for four quarters, with a contraction of 0.8% in Q3 2012.

A recent report by survey contributors at DZ Bank notes that “declining demand in the eurozone in line with painful fiscal stabilization measures” have weakened growth and demand in the Czech Republic. This is reflected in ECR’s government-finances indicator, which shows that the Czech Republic’s government finances indicator has weakened in Q3 2012. 

source: Euromoney Country Risk

Anne-Françoise Bluher, an economist at Komercni Banka and a participant in the ECR survey, notes that “the Czech Republic’s fiscal consolidation efforts are reducing public demand for investment and fiscal restrictions on consumption, and in addition exports are also slowing down. Net exports were the main drivers for growth in the past so the slowdown in the export sector is going to affect growth in the near term.”

Similarly, Slovakia saw further deterioration in its overall ECR score. The sovereign’s score fell by 0.4 points to 68.8 in Q3 2012. This falls on the back of a further score decrease between Q1 and Q2 2012, which saw the country’s score fall by 1.1 points during this period.

Slovakia’s real GDP growth fell by 0.5 from Q1 2012 to 2.8% of GDP in Q3. Demand remains weak, in part due to falling exports in the auto-manufacturing industry. The reliance on the car industry for growth and exports is making the sovereign more susceptible to fluctuations in the eurozone, particularly in Germany – a country that has also witnessed a slowdown in its exports.

While Hungary’s position in the ECR rankings has stabilized this quarter, economists continue to take a dim view of the country across all survey categories of political and economic risk.

Hungary’s marginal rebound this quarter is due to ECR contributors recording an improvement in the country’s ATCM indicator, which rose by 1.2 points in Q3 2012. However, Hungary’s economic indicators deteriorated again during Q3, a cumulative fall of 0.6 points since Q2 2012.

source: Euromoney Country Risk

An ECR expert contributor says: “Recent economic data strengthened the view that Hungary could seriously underperform the CEE region, as a consequence of the need for further fiscal adjustment, and the outstanding weak investment and lending activity that undermines the growth in capital stock and in the potential GD.”

This is supported by a recent Raiffeisen Research paper, which notes: “Deleveraging continues on the back of an unfriendly economic and regulatory environment, with government tax plans posing further risks.”

However, the events of the past two weeks could result in an even gloomier outlook. The European Commission called for further fiscal measures, with a second package being announced – this time one with many unorthodox measures.

Poland’s risk outlook remains strong, despite third-quarter slump

Economists’ perceptions of Polish sovereign risk, as measured by analysts participating in Euromoney Country Risk survey, have deteriorated between Q2 and Q3 2012, as the country’s own version of austerity has taken an icy hold on its outlook for growth.

 source: Euromoney Country Risk

Poland witnessed a substantial downward trend in its overall ECR score in Q3 2012, the third-largest ECR score decline within the CEE region this quarter. The sovereign’s ECR score fell by 1.5 points to 65.3 in September. This has resulted in Poland falling by one position since Q1 2012 to 31 in Q3 on ECR’s rankings, though it has retained its position as the fourth-safest country in the CEE region.

However, according to the rankings and ECR data, Poland’s risk penetration remains relatively strong in comparison with the country’s regional counterparts. All of the country’s economic, political and structural sub-factor indicators score five points or above – a sign that Poland remains stable for the time being.

Accounting for Poland’s slump in the third quarter of this year, Marcin Mrowiec, ECR expert and chief economist at Bank Pekao, believes that “Poland’s risk assessment will be affected by its weaker growth outlook and correspondingly higher budget deficit, which will result in greater market uncertainty.

“The data for the second quarter show the scale of the slowdown was more significant than previously assumed. The financial situation of the corporate sector remains solid but there was quite a significant slowdown of revenue in-take in the second quarter and VAT revenue has also fallen.”

Banking stress

Slovenia experienced a substantial downward trend in its overall ECR score in Q3 2012 – the largest ECR score decline within the CEE region this quarter. The sovereign’s ECR score plummeted by 5.3 points to 61.2, with score decreases across the sovereign’s economic sub-factor scores. Slovenia’s government finances, bank-stability and economic-outlook scores have been most affected since Q1, recording downward trends of more than 0.5 points.

Slovenia’s banking instability is a theme many ECR analysts have picked up on this quarter. According to ECR contributors, the sovereign has recorded the largest fall in its bank-stability score of any European country during the past two years.

In September 2010, Slovenia had a bank-stability score of 8.3 – just below Sweden and Switzerland. This has now fallen to 5.5 points, leaving it on a par with Italy for bank stability.

According to a recent Emerging Markets report: “The crisis has left its legacy: non-performing loans in the banks are much higher than they were in 2008 – particularly in countries such as Hungary and Romania, which in addition to the crisis have their own domestic political problems – and public finances have deteriorated despite the painful adjustment they went through since the crisis.”

Other regional developments

Albania overtook Ukraine in the rankings this quarter. Ukraine’s overall ECR score decreased by 0.7 points to 37.9 in Q3 2012 – resulting in its rank to fall by one position to 94.

Croatia remains the safest sovereign in southeast Europe – five places ahead of second-ranked Bulgaria. Croatia’s risk penetration has stabilized this quarter, after its overall ECR score of 53.6 remained unaltered since Q2.

Bosnia-Herzegovina remains the riskiest countries in the region, with an average ECR score of 24.55. This leaves the sovereign seven places off nearest-ranked Belarus.

Indeed, all of the Balkan states – bar Croatia – sit in tier four or five. Those countries can be equated with a credit rating of B- to D, indicating that the region is struggling to implement the required economic and structural reforms to be met under the Copenhagen criteria.

Bulgaria and Romania succumbed to increased risk this quarter. Romania’s overall ECR score fell by 0.8 points, dragging its position down into tier four in the rankings, after falling two places, from 69 to 71.