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Rising political uncertainty offsets solid growth, stable govt debt in CEE - Moody's

Rising political uncertainty offsets solid growth, stable govt debt in CEE - Moody's Metropolis Center, Bucharest

SOFIA (Bulgaria), January 11 (SeeNews) - Moody's Investor Service said on Wednesday that its mixed outlook for the sovereign creditworthiness in Central and Eastern Europe (CEE) this year reflects the region's solid growth prospects and broadly stable government debt, which are counterbalanced by rising political uncertainty that may hinder structural reform and investment and reverse deficit reduction in some countries.

"Robust consumer spending and a recovery in EU funds will underpin robust growth rates for most countries in 2017-18, which is credit positive," Evan Wohlmann, Moody's Assistant Vice President, said, as quoted by the ratings agency. "However, structural reforms securing healthy growth in the medium-term could be slowed by rising political - and hence policy - uncertainty in some CEE countries."

Out of the eight CEE countries - Bulgaria, Croatia, Czechia, Hungary, Poland, Romania, Slovakia and Slovenia - four started 2017 with stable outlooks, two with negative outlooks and two with positive outlooks, while seven are rated investment grade for the first time since 2012.

"This reflects the region's improved resilience to global economic challenges as a result of strong growth dynamics and relatively prudent fiscal starting positions," Moody's noted.

The negative outlooks on the rating of Croatia reflect the vulnerability of its fiscal and structural policies, and ultimately its economy, to rising domestic political risks, it added.

By contrast, the positive outlooks on Romania and Slovenia reflect the gradual improvements in both countries' institutional frameworks as well as robust growth expectations for Romania.

"CEE growth rates will remain between 2.5% and 3.5% for most countries in the region in 2017 and 2018, outperforming the EU and euro area as a whole," Moody's said. "Strong domestic demand will remain the key driver of economic growth across the CEE region, supported by steady gains in household consumption together with an acceleration in investment from EU funds, after a slump in 2016."

Moody's, however, cautioned that continued improvements in macroeconomic fundamentals are unlikely without reforms that address supply-side weaknesses and bottlenecks in the labour market, as well as in regulatory, judiciary and fiscal areas.

"Fiscal loosening is becoming more prevalent across the region, reflecting a greater prevalence of anti-austerity policies, together with a relaxation of fiscal stances ahead of general elections," it commented. "That said, public sector debt burdens should remain stable overall as more robust economic growth and the fiscal consolidation achieved between 2011 and 2015 help contain the size of fiscal imbalances."

External accounts and funding conditions among CEE sovereigns will remain broadly resilient to shifts in international investor sentiment. according to Moody's.

Modest rises in government bond yields may occur across the region, reflecting increased investor uncertainty over the coming months. However, Moody's does not expect a significant market reassessment of country credit risks, with yields continuing to remain at record low levels.

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