Sovereign creditworthiness across the region was bolstered by the upgrades of Latvia and Kazakhstan and the elevation of Turkey to investment grade. However, positive ratings momentum has slowed and most sovereign ratings in the region are on Stable Outlook, while Serbia and Croatia are on Negative and Latvia is on Positive.
Fitch expects the eurozone - the region’s main trading partner, source of investment and cross-border bank lending - to stagnate in 2013, after contracting 0.5% in 2012. Overall, Fitch expects EE to grow 2.9% in 2013, up from 2.3% in 2012. CIS will outperform Central and Eastern Europe (CEE), led by the resource-rich Russian economy, but a more convincing recovery in CEE is unlikely without stronger eurozone growth.
EE’s aggregate fiscal deficit widened in 2012, and will do so again in 2013. CEE countries made headway with deficit reduction plans - with notable cases of slippage - while surpluses in CIS declined. Slow growth is complicating fiscal consolidation. Only four of 19 rated EE sovereigns will reduce government debt/GDP in 2013.
The EE regional average current account (CAB) is in balance, although it will slip into deficit in 2013. Several countries, notably Hungary, Turkey and Ukraine, face large external financing requirements and this is an ongoing weakness relative to other EM regions. Current account surpluses in Russia and Kazakhstan will decline in 2013 with average oil prices projected to fall to USD100/b.
ECB policy actions in 2012 have helped drive down sovereign external borrowing costs and slowed deleveraging by Western European parent banks in the region. Nevertheless, the cumulative bank funding withdrawal from Central Eastern and Southern Europe (excluding Russia and Turkey) since mid-2011 has been 4% of regional GDP, with some countries experiencing much greater outflows than others.
The main downside risk to EE ratings is a deepening of the eurozone crisis, which would affect the region via trade and financial links. However, ECB policy actions have mitigated tail risks.
Sustained economic recovery, a more favourable backdrop in the eurozone and continued progress in adjusting public finances would be positive for sovereign creditworthiness.
