CEE safer prospects – Country Risk CEE Q1 results


Jeremy Weltman
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The Czech Republic, Estonia, Slovakia and Poland are comfortable tier-two sovereigns.

They are positioned 23rd 24th, 25th and 31st, respectively, on an ECR global risk data table that ranks 186 countries worldwide. All except Estonia were upgraded in Q1 2013 by economists and other country-risk experts contributing to the survey.

Recent trends suggest there might be a case for upgrading CEE’s three-safest sovereigns to a stable double-A credit rating, particularly when compared with declining Belgium, just one place and less than a point above the Czech Republic in 22nd position, with a similarly weak economy but a more intractable debt problem (see table).

Estonia, holding steady on a score of 70.4, has seen a substantial 18.9 point rise over the past three years, the largest improvement of any European country – in fact most of Europe has seen scores move in the opposite direction.

A strong political commitment to sound fiscal management has kept Estonia’s general government finances close to balance, while debt, though rising a little, is just 10% of GDP.

Pressures on the budget finances will increase this year, not least because of local election spending and programmed increases in civil service wages and pensions, but the government has considerable wriggle-room to do so, particularly in light of the better-than-expected fiscal performance in 2012.

Moreover, in spite of public sector investment cuts this year, economic prospects are still comparatively favourable, supported by healthy exports and consumer spending.

ECR’s experts seem to agree with the rosy outlook portrayed by the ministry of finance in its latest spring report (Estonian economy’s consistent growth will continue in the coming years), which pinpoints increased private sector investments, a favourable export orientation and rising disposable incomes supporting medium-term economic prospects.

Estonia, the Czech Republic and Slovakia all have virtually equivalent economic assessment scores of approximately 65 points each. Poland’s score is not far behind, but its economic assessment has been harmed during the past year by its trade integration with a weakened eurozone, a larger fiscal adjustment – by needing to bring the deficit down from nearly 8% of GDP in 2010 to below 3.5% this year – and the potential for exchange-rate volatility, which can affect debt valuation.

However, at least the region’s safest investment locations can count on bank stability. The four tier-two CEE sovereigns have relatively low non-performing loan ratios correlated with high ECR bank stability scores. By contrast, banks in other parts of the region have larger problems, which Euroweek has commented on (CEE banks warned about tough year ahead).

Although data for the Czech Republic is excluded from the latest transition report update from the European Bank for Reconstruction and Development (EBRD), the Czech National Bank (the central bank) states that the non-performing loan ratio for Czech households was just 5.2% in February 2013 and 7.4% for non-financial corporations, which in part justifies its bank stability score of 7.7 out of 10.

The EBRD also publishes the ratio of general government debt to revenue, where it can be seen in the chart (Slovenia’s score tracking Cyprus downwards) that Estonia, Slovakia and to a lesser extent Poland – alongside Bulgaria and Turkey – all have relatively low ratios correlated with high scores for their government finances.

This artice was originally published by Euromoney Country Risk. To discover more, resister for a free trial at Euromoney Country Risk.