Emerging Europe: Fiscal woes Source: www.d-orland.com
Fitch Ratings published a report this week analyzing the fiscal deterioration taking place in 21 countries in what it calls “Emerging Europe,” which includes three sizable economies — “rising” power Russia’s nearly $1.7 trillion economy, struggling Turkey’s $745 billion economy, and Poland’s nothing-to-sneeze-at $525 billion economy. Like much of the rest of the world, Emerging Europe juiced its economies with fiscal stimulus packages due to the Great Recession, and therefore, needs an exit strategy over the medium term to this fiscal deterioration.
Fitch rates Russian sovereign debt at BBB with a Negative Outlook (likely to be downgraded within two years); Turkey’s BB- with a Rating Watch Positive (likely to be upgraded, albeit from a low level, within the next three months); and, Poland’s debt A- with a Stable Outlook.
Fitch expects Polish GDP growth to languish before rebounding to about 3% in 2011; Russian growth to creep back above 3%; and, Turkey’s to move back to around 4% per year. Government deficits in all three will remain sizable at between 3-6% of GDP per year, though quite small next to America’s 10% this year. Poland’s government debt will rise to nearly 60% of GDP by 2011; Russia’s government debt remains very, very small (at below 15% of GDP); and Turkey’s will rise to nearly 50% of GDP before plateauing. These levels are still modest relative again to U.S. levels approaching 90% in the coming years. Poland’s and Turkey’s current account balances (a measure of trade) are in deficit, though forecast by Fitch to be below U.S. levels, which should exceed 3% of GDP in the coming years. Russia, of course, as an energy exporting powerhouse, remains in surplus on its current account.
Central European economies, including Poland’s, are expected to move out of recession nicely, driven by links to the euro area, especially to the reviving German economy. Baltic and Balkan states are rebounding less nimbly, according to the Fitch report.
A number of countries have been assisted by sizable IMF financing, including Turkey, Hungary, Armenia, Georgia, Latvia, Romania, Serbia and the Ukraine, not to mention that Poland obtained a $20.5 billion Flexible Credit Line with the IMF.
Have a look at the Fitch Press release on the report below.
Fitch: Public Finance Concerns Move to the Fore in Emerging Europe
29 Oct 2009 4:00 AM (EDT)
“Worst fears of a systemic economic and financial meltdown in emerging Europe have receded as global output has started to recover and financial conditions have eased, driven by the massive global fiscal and monetary policy stimulus, rescue packages led by international financial institutions and, in many countries, impressive economic resilience,” says Edward Parker, Head of Emerging Europe Sovereigns at Fitch.
“However, major challenges remain due to the scale of the negative shocks to hit the region; the costly legacy of the crisis, notably rising public debt ratios; and the uncertain “exit” from the crisis, recession and accommodative policy settings; while a relapse in one of the more vulnerable countries could trigger ripples across the region,” says Mr Parker.
Concerns over public finances have moved to centre stage. Fitch forecasts the impact of the recession – in some cases augmented by fiscal stimulus measures, lower oil prices and bank bail-outs – to widen the average budget deficit to 5.9% of GDP in 2009 from 1.1% in 2008, before narrowing to 4.6% in 2010. It expects the average government debt/GDP ratio to rise to 36% at end-2010 from 23% at end-2007. Failure to implement credible medium-term fiscal consolidation could lead to rating downgrades. In many countries, social pressures and elections will make it harder to implement austerity measures. This is fertile territory for political shocks. For countries reliant on IMF-led programmes for fiscal and external financing and for underpinning economic confidence, failure to stick to programme conditions poses additional risks to macroeconomic stability.
Fitch has revised its forecast for 2009 EE GDP to -6.1% from -4.6% in its June forecast round, owing to an even steeper drop than anticipated in output in H109. This contrasts with just -0.1% forecast for emerging markets as a whole. It forecasts only Azerbaijan and Poland will avoid recession, while Armenia, Estonia, Latvia, Lithuania and Ukraine will suffer double-digit declines in GDP. However, it has revised up its 2010 growth forecast to 2.6% (from 1.5%), owing to the unwinding of the deeper 2009 contraction and more supportive global conditions. Indeed, it estimates EE GDP rose by about 1% q-o-q in Q209, after plummeting 7% in Q109, led by a rebound in Turkey. But weak investment, rising unemployment, moderate capital inflows and credit growth, fiscal consolidation and a rebuilding of balance sheets point to a subdued recovery.
External financing and currency risks, which were the primary vulnerability of many countries in EE in the initial phase of the crisis, have eased somewhat, though remain material. This reflects a rapid reduction in current account deficits (CADs), substantial multilateral assistance, a boom in sovereign external issuance (USD19bn year to date) and relatively resilient private-sector roll-over rates. Fitch estimates the region’s gross external financing requirement (CAD plus medium- and long-term (MLT) amortisation) at USD304bn in 2009 and 2010, down from USD363bn in 2008.
In contrast to the rally in EE government bond prices, sovereign ratings dynamics remain negative, albeit at an easing pace. Following 11 notches of downgrades of foreign-currency Issuer Default Ratings in Q408, there were two downgrades in Q109, three in Q209 and only one in Q309. The balance of Outlooks and Watches has improved slightly since August 2009, but 12 countries are on Negative and only one on Positive. Fitch expects future rating actions to be driven more by country-specific developments than general trends.
The full report, entitled “Emerging Europe Sovereign Review: 2009”, is available on the agency’s website at www.fitchratings.com
Contacts: Edward Parker, London, Tel: +44 (0) 20 7417 6340, David Heslam, +44 (0)20 7417 4384; Eral Yilmaz, +44 (0)20 7682 7554.
