Azerbaijan, Baku, 10 November / Trend corr. N.Ismayilova / Following the conclusion of its global review of the sovereign ratings of 17 major investment-grade 'emerging market' economies, Fitch Ratings has today downgraded the sovereign ratings of Bulgaria (from BBB to BBB-), Hungary (from BBB+ to BBB), Kazakhstan (from BBB to BB-) and Romania (from BBB to BB+). Moreover, the ratings Outlook for South Africa and Russia have also been revised from Stable to Negative
"Emerging Europe is the most vulnerable Emerging Market region to the deterioration in the global financial and economic environment owing to the presence in many countries of large current account deficits and relatively high levels of short-term external debt," experts of the agency believes.
This renders them susceptible to reduced capital and financial market flows (including from foreign parent banks). Other factors that increase the region's vulnerability are the presence of significant currency mismatches on balance sheets, their relative trade openness and, in the case of Kazakhstan and Russia, their exposure to the fall in commodity prices.
Since the onset of the credit crunch in August 2007, Fitch has downgraded the foreign currency ratings of nine countries in emerging Europe by a total of 11 notches, compared with just three upgrades. Moreover, eight countries are now on Negative Outlooks - a record level for the region - while no countries are on Positive Outlooks, signaling that ratings remain under downward pressure.
Hungary's downgrade reflects the severity of the recession and post-crisis correction to macroeconomic imbalances and associated risks to the public finances and from foreign currency mismatches in the private sector. However, the EUR20bn IMF-led package of support has largely removed external financing and liquidity risks, supporting Fitch's Stable Outlook.
Bulgaria's downgrade reflects the increasing risk of a recession in response to a marked decline in external financing flows, which will necessitate a sharp contraction in domestic demand to rein in the current account deficit. However, given the strong sovereign balance sheet - large fiscal reserves mean that government net financial liabilities are virtually zero - and the broad-based commitment to the currency board arrangement (CBA), Fitch believes the risk of recession broadening into a deeper economic and financial crisis over the medium-term is limited and consistent with a Stable Outlook.
Romania's two-notch downgrade reflects Fitch's concerns about the macroeconomic policy framework in Romania and its ability to avoid a severe economic and financial crisis. With a widening current account deficit - expected to exceed 14% of GDP this year - fuelled by excessive credit growth, Fitch believes a much stronger policy adjustment, especially in fiscal policy, is needed to avoid a currency crisis. Given private sector foreign currency balance sheet mismatches, such an outcome could require substantial external financial support from the international community to prevent a sovereign credit crisis. The rating Outlook is Negative.
Although the strength of Kazakhstan's sovereign balance sheet continues to justify its investment-grade status - it is a net creditor with very little foreign currency debt - its capacity to manage its domestic banking crisis has been weakened by the global financial crisis and decline in commodity prices, warranting a downgrade by one notch and a Negative Outlook. Despite extensive support measures taken by the Kazak authorities, bank asset quality is deteriorating following the abrupt halt to capital inflows last summer and a sharp correction of the property market. Banks are a large contingent liability for the government and the provision of support to them as well as the commitment to the stability of the Tenge in the highly dollarised economy and against the backdrop of lower oil prices will potentially drain sovereign foreign assets and weaken its balance sheet.
Russia's exceptionally strong balance sheet gives it the capacity to take measures to stabilize the banking system and effectively finance the repayment of the corporate and banking sectors' external and foreign currency liabilities. However, its room for policy maneuver is constrained by the risk of deposit and capital flight, the systemic weakness of the banking system and relatively high inflation. Moreover, the decline in commodity prices will also adversely affect the sovereign balance sheet and complicate the policy response given the consequent downward pressure on the rouble real exchange rate.