Moody's: Emerging European rating outlooks may be raised

Published date: 26.01.2010 11:45 | Author: KREDITNI REJTING CRNE GORE

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Moody's Investors Service said it may raise the credit outlooks on five emerging European countries by July as the economies recover from recession and their banking systems stabilize. Moody's may upgrade to stable from negative the rating outlooks for Hungary, Latvia, Lithuania, Estonia and Montenegro, Kenneth Orchard, a London-based senior analyst at Moody's, said.

The "economies are stabilizing and the financial stresses are diminishing, so there is a possibility that these outlooks may change to stable," Orchard said. "We have seen some improvements in the last three months. This applies equally to all of them."

Emerging Europe is recovering from its deepest recession since adopting free-market policies about 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, which pledged to keep their units in the former communist states.

The economy of Latvia, which last year endured the European Union's steepest contraction, may have troughed and an improvement in the banking system there may lead Moody's to raise its outlook on the Baltic nation's ratings, Orchard said on January 20. Estonia will fulfill all euro adoption terms to become the next member of the single currency bloc starting January 1 next year, according to Moody's, LETA/BLOOMBERG informs.

"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, its highest grade for a non-euro member east 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 from Moody's, 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 and as consumers 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 expansion rates in the region, which averaged about seven percent in the five years through 2007, won't return to pre-crisis levels, Orchard said. Those "times are over," and growth will stabilize 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," said Orchard. "I would give them a roughly even chance at this point."