East Europe’s Credit-Rating Improvement May Stall, Fitch Says

East European sovereign ratings may stop improving as slowing growth makes it more difficult to manage public finances, Fitch Ratings said.

Fitch improved its assessment of the region’s economies as they emerged from the financial crisis of 2008-2009 when a sudden halt of capital flows dried up investment and a global recession dented exports. That recovery is in jeopardy by a slowdown in the euro area, the main market for east European goods, Charles Seville, a London-based sovereign-ratings director at Fitch, said in an Oct. 28 interview in Kiev.

“Ratings in the region were on an improving trend” from the beginning of 2010 through the third quarter of this year, Seville said. “That trend may not continue.”

In the past year the ratings company lifted Estonia’s, Romania’s and Latvia’s credit ratings, while raising the outlook on its assessment to “stable” for Hungary, Serbia and Lithuania and changing the outlook for Bulgaria’s grade to “positive.”

Poland’s A- rating, the fourth-lowest investment grade, carries a “stable” outlook. Even so, reelected Prime Minister Donald Tusk must demonstrate a commitment to budget cuts or face mounting negative pressure on the country’s, Fitch warned on Oct. 26.

Some countries in the region “are better prepared now than before the 2008 crisis,” Seville said. “The slowdown will not necessarily be reflected in credit downgrades.”

‘Large’ Financing Requirement

Fitch lowered Ukraine’s credit-rating outlook to “stable” from “positive” on Oct. 19 saying the country has “a large external financing requirement” since it will have to start payments next year on its earlier bailout loans from the International Monetary Fund. Gross external debt equals 77 percent of gross domestic product. The change reversed a July 21 decision to lift the outlook on the nation’s B rating, five steps below the lowest investment grade.

The key issue for Ukraine is whether the country can secure the next tranche of its $15.6 billion IMF standby loan, which is necessary to restore investor confidence in the country, Seville said.

“Until mid-year, Ukraine was on a good path: growth recovered, public finances were being consolidated and the banking system was stabilized,” said Seville. “Unlocking IMF financing would help win back the confidence of local and foreign investors in the short term, but the direction of the rating will also depend on how well the economy performs in a less favorable global environment and whether it manages to progress on more medium-term issues such as bringing down the fiscal deficit.”

Weaker Demand

Ukraine’s economy expanded 6.6 percent in the third quarter, the fastest pace in more than three years. Still, growth may slow to 3 percent this quarter as global demand for the country’s products weakened, Ihor Shumylo, the head of the central bank’s economic department, said last week.

An IMF mission is in Kiev until Nov. 4. A positive assessment of the government’s economic program may unlock tranches of the loan that were frozen earlier this year.

“There is a serious risk that the mission will fail to put Ukraine’s IMF program back on track due to differences on gas price hikes for domestic households,” said Kaan Nazli, director at New York-based Medley Global Advisors LLC, in an e-mailed note yesterday. “A potential delay for another couple of months would exacerbate Ukraine’s financing difficulties, particularly in the second and third quarters of next year, and put further devaluation pressures on the hryvnia.”

The hryvnia may lose 10 percent against the dollar, Nazli said. The currency traded at 8.0062 to the dollar at 9:19 a.m. in Kiev.

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