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Emerging Europe: Solid regional dynamic will face evolving threats

Publication Date: 10 Dec 2018 - By Gaurav Sharma (Associate Editor ReachX) By Gaurav S.

Macro Multi Asset EU


A solid economic environment in Central and Eastern Europe (CEE) and improvements in economic policy frameworks in the Commonwealth of Independent States (CIS) provide a healthy backdrop for sovereign credits in the region, according to a leading rating agency. 

In a note to clients, Fitch Ratings said growth in emerging European markets will slow, but will “remain robust”, supporting a gradual unwinding of signs of overheating. However, “external conditions” will be less favourable, and political, geopolitical and policy risks may increase. 

Overall, the rating agency remains positive on the region, keeping the bulk of its sovereign credit ratings in Emerging Europe on ‘Stable’ outlooks, and its ‘Positive’ outlooks outweigh ‘Negative’ outlooks 7:1, pointing to upward momentum for ratings in the region in 2019. 

Most of Fitch's ‘Positive’ outlooks have been in place since 2017 and are therefore likely to be resolved during 2019. The one ‘Negative’ Outlook, on Turkey, was put in place in July, ending a five-month period in which there were no ‘Negative’ Outlooks, the first time since 2007. 

Delving into greater detail in terms of rating distribution, Fitch’s ‘A-’ to ‘BB’ ratings dominate the region with 12 of the 21 rated sovereigns investment grade. 

Two sovereigns are in the ‘AA’ category after upgrades: the Czech Republic and Estonia to ‘AA-’ in 2018. Ratings at the lower end of the scale, which consists of CIS counties, have also improved with the upgrade of Belarus (B) in 2018, and could strengthen further given the Positive Outlooks on Armenia (B+) and Georgia (BB-). 

The balance of outlooks suggests the rating distribution should improve in 2019, Fitch said.

Paul Gamble, Senior Director at Fitch, noted: “We have a positive outlook for Emerging Europe sovereigns, with the balance between Positive and Negative Outlooks close to its highest since 2011. A solid economic environment in CEE and improvements in economic policy frameworks in the CIS provide a healthy backdrop. However, external conditions will be less favourable and downside risks may increase.”

What to watch: 

• Economic growth will slow across the region, potentially easing concerns about overheating in CEE, but also highlighting some fiscal issues.
• The sharp economic adjustment in Turkey will continue challenging the private sector amid an environment of policy, political and geopolitical risks.
• US trade and sanctions policies pose risks for the region. 
• Important elections will be held in Poland and Ukraine. 
• Global financial conditions will continue to tighten, with ECB moves putting more pressure on a region that, excluding Turkey, was little affected by market turbulence in 2018.


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