Economy
Hungary improves most in terms of vulnerability in CEEMEA - Morgan Stanley
The VSI
The economists at Morgan Stanley start their research note by a confession, saying their jobs as economists “changed dramatically in 2008".“While in the old days we used to concentrate mostly on the business cycle, inflation and central bank watching, the financial crisis made the analysis of vulnerability (both absolute and relative) a much more prominent part of our job. Investors wanted to know which countries would be most at risk in which situations, and why."
They stressed that there is obviously no single metric that expresses vulnerability perfectly.
In 2012, Morgan Stanely first attempted to create an aggregate metric, the VSI (Vulnerability Scoring Indicator), that would give them a sense of how each country scored in terms of the indicators that they discussed more frequently with investors. Importantly, the VSI is expressed in terms of deviation from the group, so it tells us about relative, rather than absolute vulnerability.
In today’s note, the economists presented their new, expanded VSI. They added four new variables to the analysis:
- portfolio liabilities/total,
- growth performance,
- interest payments/revenues and
- a proxy for governance.
The results
Morgan Stanley’s new VSI shows that- Ukraine is the most troubled country in CEEMEA, as fiscal and external metrics have deteriorated sharply.
- Serbia is next, due to its precarious fiscal and financial position;
- South Africa is in third place, due to its challenging external position,
- followed by Croatia and Turkey.
- CEE, Russia and the others come next, and vulnerability generally screens as below average in these countries, with
- the Czech Republic and Romania looking safest.
This is why Hungary is the star here
Morgan Stanley’s economists noted that the picture was very different prior to the crisis.In 2008, Hungary screened as the most vulnerable country in CEEMEA, but its impressive external turnaround means it screens as much safer now.
“The improvement has been impressive, and widespread (except governance indicators). Indeed, Hungary has improved more than any other country in CEEMEA on our vulnerability metrics."
“The major contributor to this improvement has been the external variables, like the C/A and external debt," the analysts said. They reminded that Hungary now has the strongest external position in all of CEEMEA, with a combined current and capital account surplus of over 9% of GDP.
“True, a lot of the latest improvement is due to oil prices, but we believe that the bulk of it is actually structural not cyclical," they added.
The analysts underlined that the sharp fall in external debt, due to conversion of FX loans and an increasingly domestic investor base for HGBs, has decreased Hungary’s external vulnerability significantly.
“And on the fiscal side, while Hungary’s debt ratio remains elevated at 78%, its interest burden and budget gap have improved significantly, both at record lows since our series begin (2000)."
In other words, a much improved ‘flow’ story is slowly but surely impacting the ‘stock’ variables, like debt.
Hungary’s improvement has left it as only moderately vulnerable; moreover, given the positive flow story, we think that Hungary’s relative standing within CEEMEA will continue to improve in the coming quarters, despite a slowdown in growth.
They added that “this augurs well" for rating upgrades and a return to investment grade, which they expect this year.The VSI and its drivers:
