Fitch: Emerging Europe’s Stable Outlook Reflects Strengthening Performance and Ongoing Challenges

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The FINANCIAL — Emerging Europe will benefit from a stabilisation in the Russian economy and stronger growth prospects in central and eastern Europe (CEE) in 2016, although political, policy and external challenges remain, says Fitch Ratings in a new report.

Fitch expects the Russian economy to stabilise in 2016, with growth forecast at 0.5% after a contraction of 4% in 2015. This should ease the pressure on the ratings of Commonwealth of Independent States (CIS) countries that have been hit by lower trade, investment and remittances from Russia. Nonetheless, the persistence of weak economic activity, together with tighter policy and generally weakening banking sectors, will constrain economic performance.

Fitch forecasts economic growth to remain solid within CEE in 2016. External factors should be generally supportive, with stronger growth momentum within the EU, low interest rates and quantitative easing by the ECB, subdued commodity prices and the stabilisation in Russia. The turn of the EU funding cycle will be the main drag on growth.

The region is generally well positioned against risks of Fed rate hikes leading to potential shifts in global capital flows. Many central European countries have improved current account balances and reduced their vulnerability to global financial volatility. Their exposure is primarily to euro exchange rate risk and ECB policy moves. CIS countries are generally not reliant on access to foreign funding. Turkey is the most vulnerable, but Fitch expects it to navigate the tougher external funding environment.

Another year of low commodity prices is forecast to buttress external positions and consumer spending within CEE sovereigns. Oil producers in the CIS have so far implemented a strong policy response to lower prices. The perseverance with policy adjustments to preserve buffers will be a key determinant of their rating trajectories.

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Geopolitical tensions are mounting in Turkey even as domestic election-related stresses recede. Fitch’s outlook assumes that the conflict in eastern Ukraine does not deteriorate and that the risk of a significant tightening of sanctions on Russia has diminished, but this remains a downside risk.

The bulk of ratings in the region have Stable Outlooks. Negative Outlooks outweigh Positive Outlooks by three (Croatia, Russia and Macedonia) to two (Hungary and Slovenia). Risks are generally well-balanced, but are greater in the CIS than in CEE.

Fiscal loosening or measures that weaken the business environment or undermine political or economic institutions are risks in several countries across the region, and have the potential to trigger negative ratings actions. Further progress with external deleveraging without disrupting growth momentum could lead to positive pressure on ratings, particularly in CEE.

A failure of the Russia economy to stabilise in line with our expectations would put pressure on the ratings of other CIS sovereigns. These would generally be aggravated if accompanied by lower-than-forecast oil prices.

 

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