Strengthening growth, diverging fiscal policy trends and political risk are themes in a recent report from Fitch Ratings that provides an overview of sovereign credit trends in European emerging markets.
The European Commission is forecasting a deterioration in the structural balance for most countries in the region, Fitch said. Output gaps remain negative, though wage rates are being pressured by strengthening growth. Commodity prices have contributed to an increase in inflation in the first quarter of 2017. Growth in central and eastern Europe is supported by distribution of European Union funds and by increasing strength of trade from western European countries. Easy monetary conditions and lowering unemployment, along with an increase in tourism, have helped domestic demand.
Political risks appear to be contained, Fitch said, in the face of recent changes to ruling factions in Bulgaria and Croatia, a new Romanian government and elections in the Czech Republic. A recovery in Russia continues, with domestic demand responding to confidence in the economic policy.
Turkey has recovered from a coup attempt, with growth reaching 5% year-over-year in the first quarter of 2017, supported by a stimulus effort by the government. “Billions have been poured into the economy to stabilize the political and economic situation and it has worked—at least for now,” said NACM Economist Chris Kuehl, Ph.D. “The issue now is whether the country has the ability to keep this up. The majority of analysts assert that it will not be able to. The country has been financing this surge of spending with debt (and expensive debt at that) given that investors are still not convinced the government is that stable. The only hope is that consumers and the business community have enough impact to boost government revenues. Most assert that there is just too much debt to handle and that it only stands to get worse.”
Fitch has taken three ratings actions in the region this year. Bulgaria was changed from Stable to Positive and Croatia was moved from Negative to Stable. Turkey was downgraded due to political developments affecting economic performance and the slowing economy weighing on banks, among other reasons.
– Adam Fusco, associate editor