Credit ratings: Baltics and Balkans in Fitch firing line


Guy Norton
Published on:

Central and eastern Europe is by no means immune to financial woes, strong economic growth levels notwithstanding.

Edward Parker, Fitch

"The negative outlooks reflect the heightened downside risk of an abrupt slowdown in capital inflows and a costly macroeconomic adjustment"
Edward Parker, Fitch

That’s the conclusion of Fitch Ratings, which is warning that widening current account deficits in several countries in the region pose a threat to their economic stability.

The London-based ratings agency recently slashed the outlooks on its ratings for Bulgaria, Estonia, Latvia and Romania from stable to negative, principally as a result of growing trade imbalances. In December, Fitch had also cut the outlook on its rating for Lithuania from stable to negative, citing similar concerns.

"Current account deficits in the Baltic states, Bulgaria and Romania have risen to levels that look disconcertingly stretched by current global or historical standards," says Edward Parker, head of emerging Europe sovereigns at Fitch. "External deficits that were easy to fund in times of abundant liquidity and risk appetite may be harder to finance following the global credit shock. The negative outlooks reflect the heightened downside risk of an abrupt slowdown in capital inflows and a costly macroeconomic adjustment."

In a report entitled Mind the Gap!, Fitch estimates the 2007 current account deficits at 25% of GDP in Latvia, 19.5% in Bulgaria, 16% in Estonia, 13.7% in Lithuania and 14% in Romania – among the highest of all of the 105 Fitch-rated sovereigns.

Since last year, Fitch has been warning that substantial deficits, external financing requirements and rapid credit growth have been long-standing rating weaknesses in the Baltic republics and parts of southeastern Europe. However, its concerns have risen recently as a result of further growth in macroeconomic imbalances and the US-inspired global credit crunch, which it says is a significant negative shock. In addition, Fitch notes that inflation has risen sharply, weaker euro-area GDP growth will adversely affect exports, and delays to euro adoption will further exacerbate external financial risks. Fitch believes the economic outlook for the region has therefore weakened and that rating dynamics have shifted.

Fitch says that rapid bank lending growth and external borrowing, often from foreign parent banks, has played a key role in both fuelling and financing current account deficits. It adds that while high rates of foreign bank ownership have been a net positive for emerging Europe, they could open a channel of contagion if the global credit squeeze persists.

Fitch believes that a broadly soft landing remains the most likely outlook in each of the countries whose ratings it recently revised to negative.