Economy 9 December 2022, 8:50am

Fitch has negative rating outlook for Emerging Europe

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Fitch Ratings expects credit conditions for sovereigns in emerging Europe to deteriorate in 2023 owing to the war in Ukraine and associated spillovers (notably energy) and policy responses, the rating agency said in its Emerging Europe Sovereign Outlook for 2023 earlier this week. The rating outlook for the region is negative. The outlook for Hungary's rating remains stable.

Six sovereigns have Negative Outlooks and two Positive; two sovereigns are rated at a level for which Fitch does not have Outlooks.

The two other economies in the group - Ukraine and Belarus - are rated so low by Fitch Ratings that the firm does not have a separate rating outlook for them. Ukraine is rated 'CC' and Belarus 'RD' (Restricted Default), indicating a limited sovereign default.

Among the regional economies, the outlook is negative for the Czech Republic, Estonia, Macedonia, Romania, Slovakia and Turkey.

Fitch Ratings affirmed Hungary's 'BBB' investment grade long-term foreign currency-denominated sovereign debt ratings on both of its two rating review dates this year, 28 January and 22 July, with an unchanged stable outlook.

The distribution of outlooks is worse now than at end-2021 when there were four Negative Outlooks and three Positive Outlooks, Fitch noted. Three of the four with Negative Outlooks at end-2021 retain these Outlooks, and Turkey was downgraded twice in 2022. Two of the three end-2021 Positive Outlooks were resolved; one upgrade and one reversion to Stable (and subsequent downgrade: Ukraine). Fitch withdrew Russia’s ratings in 2022.

Economic growth will slow sharply, hitting government revenues, and measures to offset the impact of higher energy prices will add to worsening fiscal positions in central and eastern Europe (CEE).

Developed-market central bank tightening will add to pressure on sovereign borrowing costs resulting from high domestic rates, Fitch added. The result will be reduced private expenditures and investment.

Inflation will stay close to multi-decade highs in much of the region. Base effects may cause a decline in headline rates but underlying pressures are strong.

Developed-market central bank tightening will add to pressure on sovereign borrowing costs resulting from high domestic rates. Sovereigns in the Commonwealth of Independent States (CIS) weathered 2022 remarkably well, but this resilience may be tested in 2023 with geopolitical risks remaining elevated.

The pressure from these factors will also impact growth in key trading partner economies in the emerging markets of Central and Eastern Europe, the rating agency said, forecasting that euro area GDP will contract by an average of 0.1% on average over 2023 as a whole.

In this environment, Fitch expects the median growth rate for the 13 emerging economies in Central and Eastern Europe that it has sovereign debt ratings for to be just 1.1% next year. The spillover economic effects of the war in Ukraine will also have a negative impact on the growth performance of emerging Europe and the euro area next year, according to forecasts from other major London houses.

Moody's Investors Service said in its annual forecast that it expects real GDP growth for the world economy as a whole to slow to 1.7% next year from 3% this year. Moody's pointed out that its previous forecast, issued in February before the start of the war in Ukraine, had predicted an average 4.5% expansion of regional GDP in Central and Eastern Europe by 2023, but in its new forecast it has lowered this to 1.3%. In Western Europe, the rating agency expects an average annual GDP contraction of 0.4% in 2023, down from 1.9% in its previous forecast.