Stabilization could lead to rating upgrades

RIGA - Moody’s Investors Service said it may raise the credit outlook on five of Europe’s emerging market countries by July as their economies recover from recession and their banking systems stabilize, reports Bloomberg. The agency says it may upgrade to stable, from negative, the rating outlooks for Hungary, Latvia, Lithuania, Estonia and Montenegro, says Moody’s senior analyst Kenneth Orchard. He notes that the “economies are stabilizing and the financial stresses are diminishing, so there is a possibility that these outlooks may change to stable. We have seen some improvement in the last three months. This applies equally to all of them.”

Emerging Europe is recovering from its deepest recession since turning to free-market economic policies two decades ago. The economies of Hungary and Latvia, which were on the brink of default in 2008, stabilized after international bailouts and government austerity measures restored state finances. The region’s banks benefited from support from their western parents.  Latvia’s economy, which last year delivered the European Union’s steepest contraction, may have bottomed and an improvement in its banking system may lead Moody’s to raise its outlook on the country’s ratings, Orchard said. Estonia “will fulfill all euro adoption terms to become the next member of the single currency bloc starting Jan. 1 next year,” claims Moody’s. “In Estonia, we are very optimistic about euro adoption,” Orchard said. “That would mean an effective elimination of balance of payment risks. That would be credit positive.”

Moody’s rates Estonia’s foreign-currency debt A1, the highest grade for a non-euro member Eastern European state, along with the Czech Republic. It has a Baa3 rating for Latvia, the lowest investment grade, and rates Hungary and Lithuania two steps higher, at Baa1. Montenegro has a Ba3 rating, three steps below investment grade.
The Eastern Europe region’s recovery remains at risk amid a lack of demand from Germany and other Western European markets as well as from consumers who continue to face rising unemployment as banks stay cautious on lending. “Banking sectors are weak because of slow growth and rising unemployment, and non-performing loans are high and still rising in many countries and that means these banks are going to be reluctant to engage in a lot of new lending, and that’s going to hamper economic growth,” said Orchard.

“It’s going to be a year of financial stabilization, yet sluggish recovery. In December, when you look back on the year, this is going to be the main story.” Economic growth rates in the region, which averaged about seven percent per year in the five years through 2007, won’t return to pre-crisis levels, says Orchard. Those “times are over,” as growth stabilizes at about three percent to four percent a year, even after the recovery, he said. Emerging Europe’s economies are likely to grow at a rate of 1.1 percent this year and 3.1 percent next year, according to Moody’s.

After Estonia, which the European Commission estimates will have the EU’s lowest debt-to-GDP ratio this year at about 11 percent, no other eastern EU country will adopt the euro before 2014, Orchard said. Latvia and Lithuania, which would like to start using the euro in four years, have got “a lot of fiscal cutting that will need to be done to reach the three percent target,” he added.