Latvia, Lithuania and Estonia succumbed to increased risk in Q3, according to Euromoneys Country Risk Survey, in spite of their previously favourable score trends.
Various factors might account for the increased risk in the Baltics, including the continued weakness of the eurozone, but the Swedish and Russian economies are undoubtedly substantial contributors, given the two countries strong trade, investment and banking sector links with the Baltic states.
Top ranking Estonias score fell by 1.1 points to 69.8 out of 100, although it remains one of the least risky countries in Central and Eastern Europe. Estonia is rated 24th out of 186 countries assessed in ECRs global scoreboard, 19 points better than the regional average.
ECR Baltic expert Tonu Mertsina, chief economist at Swedbank, says: We have substantially revised down Russias economic growth forecast for 2013-2015 and Russia is Estonias third-largest export partner.
Estonias economic outlook has been downgraded, too, because of reduced EU structural funds and wages rising faster than productivity growth. Slower GDP growth of 1.5% this year, rising to 2.5% in 2014, is predicted by the IMF in the latest biannual World Economic Outlook released this month.
Lithuania, within the third of ECRs five tiered groups, has slipped two places to 47th on the back of a 0.5 point drop in its score to 56.3. The sovereign had been on a rising score trend due to robust economic growth.
Several of Latvia and Lithuanias risk factors still fail to make the grade, including government finances and the employment/unemployment situation.
Both countries are seeing their unemployment rates decline, but only to around 11% next year, according to the IMF. This is a burden on government transfers and tax receipts, making their reasonably favourable fiscal dynamics vulnerable.
Latvia has the added problems of an unstable minority government and weak capital market access both factored into the countrys risk score making it the more susceptible to external creditor assistance. It has the weakest political risk assessment, according to ECR experts, trailing Estonias by almost 12 points notably for corruption, the regulatory and policy environment and government stability. Its economic assessment score is also the worst of the three Baltic states.
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