Poland’s improving fortunes highlight pockets of safety in CEE
The majority of Central and Eastern European sovereigns have been upgraded by Euromoney's country risk survey since the third quarter of 2014. Hungary is still irking the experts with its heightened political risks, but elsewhere there are still reasons to be cheerful about the region’s prospects.
From top-rated Czech Republic, Slovakia and Poland, respectively 23rd, 28th and 29th in Euromoney’s 186-strong global rankings, to higher-risk Romania, Montenegro and Bosnia-Herzegovina, there has been country-risk improvement in the Central and Eastern Europe region since the third quarter of 2014. It is now viewed in a more favourable light than the eurozone strugglers or other emerging markets posing questions.
Some of the region’s credits are still high risk of course. Eight countries, including some of the former Soviet satellite states, such as Belarus and Ukraine, are mired in the lowest of Euromoney’s five tiered categories, which contains the world’s highest default risks.
Hungary’s appeal is still waning too as an improving economy is outflanked by political risk negatives concerning transparency, and the government’s unorthodox policies, which are failing to tackle the gross debt burden, which came in at just over 77% of GDP in 2014.
Yet although Central and Eastern Europe is vulnerable to the Russia-Ukraine crisis, deterioration in the eurozone and, recentlly, the revalued Swiss currency affecting franc-denominated mortgage borrowing, country risk experts have recently taken a more sanguine view of certain borrowers given their decent growth performance and manageable debt burdens.
Czech Republic remains a safe haven
The Czech Republic and Poland, which both benefit from being outside the eurozone and having independent currencies, enjoyed upgrades in the fourth quarter of 2014, ending up with higher ECR scores than at the beginning of the year.
The Czech Republic is still the safest sovereign investment in the region on a score of 69.3 from a maximum 100 points, only two points lower than in 2010, compared with an average 10-point drop for the eurozone.
Adjunct professor at Trinity College Dublin Constantin Gurdgiev expects improved GDP growth in 2015 of around 2.4% to 2.5% compared with 2% in 2014. He says: “The Czech Republic is insulated from geopolitical risks and has taken a pragmatic approach to the conflict in Ukraine.”
There are negatives in that the central bank has fewer policy options than its Polish counterpart to address deflationary pressures, with interest rates already lower.
Still, seven of its 15 economic, political and structural risk factors were upgraded last year, seven were stable and only one (“demographics”) edged slightly lower.
It is no wonder that its five-year credit default swap spread is a little tighter than the 50 basis points available on Ireland and Japan.
A similar picture emerged in 2014 for Latvia, Lithuania and Romania, all of which finished the year with higher ECR scores.
A higher risk score equates to experts’ perceptions of increased safety, and all five deserve their reputation, not least for maintaining debt burdens below 50% of GDP, compared with a growing number of eurozone sovereigns that now have triple-digit ratios.
Poland a bright spark
Poland’s prospects are also bright in spite of the mortgage debt problem tied to rising Swiss franc denominated debt, which has become a smaller share of total lending in recent years and is unlikely to fully constrict consumer spending.
Poland’s risk score, which had slipped during the third quarter of 2014, improved in the final months of the year. At 66.7 points from a maximum 100, the country has risen three places in Euromoney’s country risk rankings to 29thout of 186 sovereigns and into a more comfortable tier-2 position alongside Slovakia, Estonia and the Czech Republic – commensurate with an A- to AA credit rating.
Gurdgiev attributes that to “its geopolitical stance and domestic policies, creating the impression of a safe haven within the CEE region, aided until recently by zloty depreciation, fiscal spending and positive investor sentiment”.
He expects risks to rise a little with slower growth and a deepening current account deficit in 2015.
The European Commission released its latest economic forecasts earlier this month, predicting that Poland’s real GDP growth will remain above 3% in 2015 and 2016, with its general government deficit slipping below 3% of GDP and gross debt stabilizing at just under 50% of GDP.
Romania on the rise
Romania's economic risk improved across the board in 2014, notably concerning monetary policy/currency stability, the economic-GNP outlook and employment/unemployment situation.
Romania’s risk score increased to 48.6 points, pushing the sovereign three places higher to 66th and less than two points from tier-3 status, equivalent to a credit rating of BB+ to A-. Romania in any event now commands the lowest triple-B grade from Fitch, Moody’s and Standard & Poor's.
Impressive growth rates
The eurozone recovery, aided by deflation from falling oil prices and monetary stimulus, is a boon to these open economy net energy importers, not least with Germany, a key trading partner, bouncing back towards the end of last year.
With no strong fiscal austerity required, Romania grew in real terms by 0.5% quarter on quarter (q/q) and 2.5% year on year (y/y) in the fourth quarter of 2014, Slovakia by 0.6% q/q and 2.4% y/y. The Baltic states, Estonia, Latvia and Lithuania, also posted decent growth rates in spite of diminished Russian trade, and Poland’s strong economy was kept bubbling along at 0.6% q/q and 3.1% y/y.
As Poland amply illustrates, these countries are benefiting more from closer integration with the European Union than Russia and other former Soviet states, latching on to stronger economies such as Germany and the UK for trade and capital flows.
They are also benefiting from comparative political stability yielding decent, well-designed, orthodox policy programmes resulting in fiscal improvements, unlike the enormous debts burdening Greece, France, Italy and other European sovereigns.
Whereas the Russian crisis will hold back prospects in the CIS, the core economies of Central and Eastern Europe should benefit from the gradually improving economic picture for the eurozone.
Falling food prices resulting from bumper harvests in Bulgaria and Romania, combined with lower energy bills and borrowing costs as interest rates are reduced, will support domestic demand.
The World Bank’s latest Global Economic Prospects report foresees these favourable trends continuing in the region this year. It seems Europe is not all doom and gloom.
This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.