SOFIA (Bulgaria), August 28 (SeeNews) – Croatia, Bulgaria and Romania rank among the most vulnerable emerging economies in a Fitch index of relative vulnerability to external financing pressures of east European countries, the global rating agency said on Thursday.
Croatia ranked second, Romania was fifth and Bulgaria ranked seventh among the 20 emerging economies from Eastern Europe, the Caucasus and Central Asia included in the index, Fitch said in a report. Latvia led the list.
Serbia ranked ninth, Moldova - fifteenth and Macedonia - eighteenth.
Fitch’s index of relative vulnerability is based on equal weighting of three factors: the current account balance plus net equity foreign direct investments (as a percentage of GDP), short-term external debt on a residual maturity basis (as a percentage of foreign exchange reserves) and net external debt (as a percentage of current external receipts) for 2008.
“It is somewhat surprising to see Croatia as high as second in this list, though relatively weak external finances have been the main factor constraining its rating at ‘BBB-’ for some time,” Fitch said.
Regarding Bulgaria and Romania, Fitch said that the magnitude of the two countries’ current account deficits, which are among the 10 largest out of all 105 Fitch-rated sovereigns, is unsustainable and raises concerns.
Romania’s current account gap for last year was equivalent to 14% of the country's gross domestic product (GDP). Romania's National Prognoses Commission has projected the 2008 current account gap at 14.9% of GDP.
Bulgaria, where booming domestic demand has pushed the country’s current account deficit to 21.7% of GDP in 2007, expects the gap to narrow to 21.1% of the projected GDP in 2008.
External borrowing to finance current account deficits is increasing external debt burdens in most of these countries, Fitch said. Current account deficits, in combination with rapid bank credit growth, strong real estate activity, asset price booms and rising inflation raises point to economies overheating and the risk of a painful macroeconomic correction ahead.
Also, tighter global liquidity, reduced global risk appetite and elevated risk premiums on counties with large current account gaps and declining growth prospects heighten the risk of finances drying up, which could lead to recession and/or downward pressure on exchange rates.
“Such a scenario poses additional risks for countries with currency board arrangements (…) or currency pegs,” Fitch said.
Since July 1997 Bulgaria has been operating an IMF-prescribed currency board system, a tight monetary arrangement that ties the level of cash in circulation to the amount of central bank reserves. The fixed exchange rate of the Bulgarian lev under this system is 1.95583 per euro.
“A clear adjustment of unsustainable macroeconomic imbalances has yet to take hold in Bulgaria and Romania. The slowdown in export markets will make it more difficult for them to reduce their CADs [current account deficits],” Fitch said.