MOSCOW. Dec 22 (Interfax) - The deterioration in the eurozone economic and financial outlook is leading to weaker economic growth, heightened financial vulnerabilities and some negative rating actions in Emerging Europe, Fitch Ratings said in an Emerging Europe (EE) Sovereign Outlook report for 2012.
"Central and Eastern Europe is by far the most exposed emerging market region to the eurozone crisis owing to strong trade flows, banking sector linkages and, in some cases, portfolio investments, currency risks and substantial gross external financing requirements," says Charles Seville, Director in the sovereign group at Fitch Ratings. "Countries in the Commonwealth of Independent States are less directly exposed, though would be hard-hit if commodity prices were to drop sharply - which is not Fitch's base case," the report says.
"Since October 2011, Fitch has taken negative actions on seven Outlooks (mainly revisions from Positive to Stable) in the region: Czech Republic ('A+'/Stable), Bulgaria ('BBB-'/Stable), Hungary ('BBB-'/Negative), Latvia ('BBB-'/Stable), Lithuania ('BBB'/Stable), Turkey ('BB+'/Stable) and Ukraine ('B'/Stable). There are currently two countries in CEE on Negative Outlooks - Croatia ('BBB-') and Hungary - while three CIS countries are on Positive Outlooks: Azerbaijan ('BBB-'), Kazakhstan ('BBB') and Russia ('BBB'). \
Fitch has recently cut its 2012 growth forecast for the EE region to just 2.8% (1.5% excluding Russia), down from 4.1% in its June forecasts. This largely reflects the impact of the downward revision to GDP growth in the eurozone to just 0.4% in 2012 (from 1.8% in the June forecasting round). The open economies of CEE will be particularly affected via weaker export growth.
Many countries still have work to do to stabilise public finances. Most managed to narrow fiscal deficits further in 2011, with the aggregate EE deficit falling to 1.4% of GDP in 2011 from 4% of GDP in 2010. Thirteen of 19 rated EE countries will make further deficit reductions in 2012, but the pace of improvement will stall as growth slows. The aggregate fiscal deficit in EE will widen to 2.1% of GDP, mainly as a result of higher deficits in Turkey and Russia. A small majority of EE sovereigns will see their debt/GDP ratio rise in 2012 to a projected average of 32% of GDP.
Heightened global risk aversion may make international capital market access more expensive. Fitch estimates that countries in the region face sovereign Eurobond redemptions of USD19bn during 2012, the highest of any EM region, as well as some debt repayment to the IMF and EU.
EE on aggregate runs a balanced current account position, in contrast to 2007 and 2008, leaving countries better placed now to cope with external shocks. Yet several countries run wide current account deficits (CADs) and/or face large external financing requirements in 2012, including Turkey. In general, EE sovereigns have larger external financing requirements than other major EMs, making them more vulnerable to heightened risk aversion and reduced cross-border capital flows.
Fitch expects growth in CEE in particular to be constrained by sluggish bank lending growth. Subsidiaries of eurozone banks account for between 50%-90% of banking system assets in the eight non-Baltic CEE countries rated by Fitch. A deepening in the eurozone crisis could lead to a reduction in funding availability for these subsidiaries, which could force them to become increasingly self-sufficient.
Russia and the CIS face a smaller direct shock from the eurozone turmoil. Fitch forecasts Russia to grow by 3.5% in 2012. Commodity-rich Kazakhstan and Azerbaijan are on positive outlook as sovereign balance sheets strengthen, outweighing financial sector concerns. Georgia - which Fitch upgraded to 'BB-'/Stable in December - and Armenia are making progress in reducing fiscal deficits. Both have benefited from multilateral crisis support but face a tougher task to reduce external vulnerabilities. The main exception to the positive picture is Ukraine ('B'/stable); where its large steel and chemicals industry ties its fortunes closely to the economic cycle, and a widening current account deficit adds to external financing risks.
The Baltic states have undergone a severe adjustment to correct macroeconomic imbalances and have returned to growth. Nevertheless, Latvia and Lithuania still need to continue fiscal adjustments in 2012, which will be more difficult against a backdrop of weaker growth as export growth slows to the EU (albeit primarily its stronger member states). The Baltic states' banking systems are most closely linked with the Nordic countries, which lie outside the eurozone.
As well as country specific factors, the main downside risk to EE ratings is a deepening of the eurozone crisis, which would affect the region via trade and financial linkages. In the CIS, Fitch notes that political risks could take a higher profile, following Russia's disputed parliamentary elections held on December 4," the report says.
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