central and eastern europe karen vartapetov ludwig heinz
TRANSCRIPT
March 11, 2021
Karen VartapetovLudwig HeinzNiklas SteinertGabriel Forss
Central And Eastern Europe Sovereign Rating Outlook 2021This article does not constitute a rating action
Key Takeaways
– Central and Eastern European (CEE) sovereigns absorbed the shock from COVID-19 relatively well, thanks to strong macroeconomic fundamentals and flexible policy settings.
– The output contraction was smaller than in many other regions, external profiles remained resilient, the fiscal fallout has been moderate, and the banking systems remained stable.
– In 2021, CEE economies are set to recover by 4.1% on average, supported by easing pandemic-related restrictions at home and abroad, and the EU’s ample transfers and accommodative policies.
– Despite higher public debt, sovereign borrowing costs will remain at historical lows.
– All CEE sovereigns we rate carry stable outlooks, except for Romania, which has had a negative outlook since before the pandemic.
– Risks to our macroeconomic assumptions and ratings include weaker recovery due to the pandemic amid delays in mass vaccination; policy missteps; and countries’ inability to fully benefit from EU funding, including the Recovery and Resilience Facility.
Real GDP Growth, 2020 CEE Real GDP Growth By Country, 2020 (%)
Economic Contraction Was Less Severe Than In Other Regions
3
Averages are based on purchasing power parity GDP weights. SS Africa--Sub-Saharan Africa. LATAM-6--Argentina, Brazil, Chile, Colombia, Mexico, and Peru. CEE—See countries listed in the chart on the right. Source: S&P Global Ratings.
Source: S&P Global Ratings.
– The recession in most CEE countries (see chart on the right for full list of countries) was less significant than we previously forecast, and less severe than in other regions, due to short and effective lockdowns, resilient exports, and policy support.
2.1
(3.2) (3.9)(4.8) (5.5)
(7.2) (7.7)(9.0)
(4.0)
(12)
(10)
(8)
(6)
(4)
(2)
0
2
4
%
(10)
(8)
(6)
(4)
(2)
0
Bulgaria
Croatia
Czech Rep.
Estonia
Hungary
LatviaLithuania
Poland
Romania
Slovakia
Slovenia
July 2020 forecast Latest forecast
CEE Countries Reduced Debt In Recent Years (CEE Average) Monetary Flexibility Remained Relatively High Across The CEE
Policy Flexibility Enabled Policymakers To Respond To COVID
4
Narrow net external debt = gross external debt net of liquid financial and public sector external assets. Net gov’t debt = gross gov’t debt net of liquid assets. CAR--Current account receipts. Source: S&P Global Ratings.
We derive our monetary flexibility assessment (1 is the highest, 6 the lowest) by combining our assessments of the exchange-rate regime and the monetary policy credibility, factoring in the depth and diversification of the resident financial system and capital markets. Source: S&P Global Ratings.
– Significant deleveraging pre-COVID-19 and generally flexible monetary settings allowed for a countercyclical policy response to COVID-19.
– Rigid exchange-rate regimes did somewhat limit monetary flexibility for some countries though.
0 10 20 30 40 50
2019 2015
Narrow net external debt (% of CAR)
Net general government debt (% of GDP)
Bulgaria
Croatia
Czech Republic
EstoniaHungary
LithuaniaLatvia
Poland
Romania
Slovakia Slovenia
1
2
3
4
5
6
(10) 0 10 20 30 40 50 60 70 80
Mon
etar
y fl
exib
ility
ass
essm
ent
Net public debt as % of GDP (end-2019)
Less policy flexibility
More policy flexibility
The Pandemic Has Only Resulted In Outlook Revisions In The CEE
5
• As of March 11, 2021. Arrows denote positive (green) and negative (red) actions on outlooks since March 1, 2020. Source: S&P Global Ratings
- We have not downgraded any CEE sovereigns, since the outbreak of the pandemic.
- We revised our outlooks on Hungary, Bulgaria, and Estonia to stable from positive, due to high uncertainly over the impact of COVID-19 on their economy and government balance sheets.
- In July 2020, we revised our outlook on Slovakia to negative on risks of large economic and fiscal fallout, but revised it to stable again in January 2021 on better macroeconomic performance amid strong pan-European fiscal and monetary stimulus.
- Romania has carried a negative outlook since before the pandemic, on risks of widening external and fiscal deficits.
Sovereign FC ratings* Outlook revisionssince March 2020
Czech Republic AA-/Stable/A-1+ -Slovenia AA-/Stable/A-1+ -Slovakia A+/Stable/A-1 Poland A-/Stable/A-2
Hungary BBB/Stable/A-2 Bulgaria BBB/Stable/A-2 Croatia BBB-/Stable/A-3 -
Romania BBB-/Negative/A-3 -Estonia AA-/Stable/A-1+ Latvia A+/Stable/A-1 -
Lithuania A+/Stable/A-1 -
Rating Distribution Among CEE Sovereigns CEE Sovereign Rating Distribution As Of March 2021
All CEE Sovereigns Carry Investment-Grade Ratings
0
2
4
6
8
10
No.
of s
over
eign
s
AA A BBB BB
6
BBB36%
A36%
AA27%
Source: S&P Global Ratings. Source: S&P Global Ratings.
– The distribution of CEE sovereign ratings has remained unchanged across all categories since the start of the pandemic.
GDP Recovery In 2021 Will be Swift, But Incomplete
0
1
2
3
4
5
6
%
2021 2022
7
– We expect economic recovery will be supported by easing restrictions at home and abroad, pent-up consumer demand, investment on the back of ample EU transfers, and continued policy support.
– That said, it may take until 2022, or 2023 in some cases, for GDP in to return to 2019 levels.
– However, we consider there remains a high level of uncertainty around our projections, due to the pandemic, mass vaccination delays, and variants cropping up.
Source: S&P Global Ratings.
Real GDP Growth
EU’s RRF Grants To CEE Countries* External Deficits Are Generally Overfunded By Net FDI And EU Grants
Generous EU Transfers Will Contribute To Growth
0%
2%
4%
6%
8%
10%
12%
% o
f 201
9 G
DP
2021-22 (fixed) 2023 (depending on loss of GDP)
8
5.1
1.4
1.0
0.9
1.3
1.1
1.8
1.9
2.0
0.8
1.0
0.5
0 1 2 3 4 5 6
Romania
Slovakia
Hungary
Croatia
% of GDP
Current account deficit*
Capital account balance* (including EU grants)
Net FDI*
*RFF--Recovery And Resilience Facility. Source: European Commission. FDI—Foreign direct investment. *S&P Global Ratings’ forecast for 2021. Source: S&P Global Ratings.
– Our baseline assumption is that EU funds will support growth, as well as fiscal and balance of payments performance for all CEE sovereigns.
Gross Government Debt Increased Sharply In 2020 The Cost Of New Issuance Has Declined
Historically Low Cost Of Funding Will Mitigate Higher Debt Burden
0102030405060708090
Bulgaria Czech Rep. Romania Poland Hungary
% o
f GD
P
2019 Increase in 2020
9
0
1
2
3
4
5
6
Romania Hungary Poland Czech Rep. Bulgaria
%
Effective GG rate, 2020Effective GG rate, 2014Cost at issuance*, 1Q 2021
Source: S&P Global Ratings. GG--general government. *Defined as cost of five-year local-currency issuance in early 2021; effective interest rate refers to interest expenditures divided by outstanding debt stock. Source: S&P Global Ratings.
– Although CEE governments’ debt rose sharply in 2020, this is somewhat offset by borrowing costs dropping below effective interest rates on existing debt across the CEE.
Public Debt Is Likely To Stabilize As A Share Of GDP By 2023
10
– We expect debt to GDP will stabilize for most CEE sovereigns, assuming interest rates remain low, and economic growth will recover.
– Risks to long-term fiscal stability include prolonged lockdowns, political resistance to reforms, and premature monetary tightening.
– For more, see “Sizing Sovereign Debt And The Great Fiscal Unwind,” published Feb. 2, 2021.
PPT—Percentage point. Source: S&P Global Ratings.
New COVID-19 Cases Per Million People
Risk 1: Longer And Stricter Lockdowns Delaying Recovery
0
200
400
600
800
1,000
1,200
1,400
Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21
7-da
y m
ovin
g av
erag
e Slovakia
Romania
Croatia
Blugaria
Poland
Hungary
Czech Republic
11
Source: Ourworldindata.org, Data as of end-February 2021.
– The CEE is facing a third wave of COVID-19 infections. Although renewed mobility restriction are less stringent than those in place in Spring 2020, recovery could be fragile
CEE Vaccination Has Accelerated And Exceeds EU Levels A Significant Share Of The Population Is Reluctant To Vaccinate
Risk 1 (continued)
1.9
2.5
4.1
6.2
6.7
6.9
7.0
7.1
7.3
7.3
0 2 4 6 8
BulgariaLatvia
CroatiaEU
EstoniaHungarySlovakia
LithuaniaPoland
Romania
Total vaccinations per 100 people
12
60
46 45 44 38
0
10
20
30
40
50
60
70
CzechRepublic
Hungary Bulgaria Poland Romania
Data as of late February 2021.Source: Ourworldindata.org. Source: local opinion polls in late 2020.
– Although CEE countries have accelerated COVID-19 vaccinations, reluctance to vaccinate among the population could delay mass immunization.
Fiscal Deficits Should Narrow (GG deficits, % of GDP) Direct Fiscal Measures Will Likely Reduce
Risk 2: Suboptimal Pace Of Policy Normalization
(8.0)
(6.0)
(4.0)
(2.0)
0.0
Croatia
Latvia
Estonia
Bulgaria
Poland
Czech Rep.Slovakia
Slovenia
Lithuania
Hungary
Romania
20212022
13
0 1 2 3 4 5 6 7
Romania
Bulgaria
Czechia
Croatia
Slovakia
Hunagry
Poland
% of GDP
2020 2021
Source: S&P Global Ratings. GG—General government. Source: S&P Global Ratings
– Though we project strong fiscal consolidation as COVID-19 abates, determining an appropriate pace of stimulus withdrawal will be difficult.
– If governments prematurely withdraw policy support, economic recovery could suffer.
– Conversely, if supportive policies are extended, this could result in the continued build-up of public debt and weigh on fiscal stability.
Risk 3: Challenges Absorbing Funding Could Weaken Recovery
Estonia Lithuania
Latvia PolandSlovenia Hungary
Czech RepublicBulgariaSlovakia
Romania
Croatia
20
30
40
50
60
70
80
1 2 3 4 5
EU
fund
abs
orpt
ion
rate
(%)
S&P Global Ratings' institutional assessment
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– The EU fund absorption rate has typically been lower in sovereigns with weaker institutional settings.
– To take advantage of new EU funding, governments will need to design eligible projects and implement accompanying reform agendas.
– The rule of law conditionality to EU funding could delay or interrupt EU transfers to some CEE countries, weakening their growth outlook.
Our institutional assessment combines the analysis of the effectiveness, stability, and predictability of policymaking and political institutions; and the transparency and accountability of institutions, data, and the coverage and reliability of statistical information. Source: S&P Global Ratings.
Absorbing EU Funding Could Be Difficult For Some CEE Sovereigns
Stronger Weaker
CEE Sovereign Strengths And Weaknesses By Key Rating Factors
FC ratingsInstitutional assessment
Economic assessment External assessment
Fiscal assessment: flexibility and performance
Fiscal assessment: debt burden
Monetary assessment
Bulgaria BBB/Stable/A-2 4 4 2 2 1 5
Croatia BBB-/Stable/A-3 4 4 2 2 5 4
Czech Rep. AA-/Stable/A-1+ 2 3 1 3 2 2
Estonia AA-/Stable/A-1+ 2 3 2 2 1 3
Hungary BBB/Stable/A-2 4 4 2 4 4 3
Latvia A+/Stable/A-1 3 3 2 2 2 3
Lithuania A+/Stable/A-1 3 3 1 2 2 3
Poland A-/Stable/A-2 4 4 2 4 2 2
Romania BBB-/Negative/A-3 4 4 3 4 3 3
Slovakia A+/Stable/A-1 3 3 2 3 2 2
Slovenia AA-/Stable/A-1+ 3 3 1 3 3 2
Mean -- 3.3 3.5 1.8 2.8 2.5 2.9
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FC—Foreign currency. Ratings as of March 11, 2021. Source: S&P Global Ratings.
CEE Economic Outlook
Real GDP growth (%) GG balance / GDP (%) Net GG debt / GDP (%)Current account balance / GDP
(%) Narrow net ext. debt / CAR (%)
2020 2021 2020 2021 2020 2021 2020 2021 2020 2021
Bulgaria (4.5) 4.0 (5.1) (5.0) 17.5 21.5 0.5 0.4 (40.1) (37.0)
Croatia (8.4) 5.6 (7.8) (2.9) 78.8 76.8 (1.0) (0.9) 38.6 29.8
Czech Rep. (8.6) 4.9 (7.0) (5.8) 28.1 32 0.9 0.5 (18.4) (15.8)
Estonia (2.5) 2.6 (5.5) (4.5) 2.0 6.4 3.3 1.9 20.2 17.0
Hungary (6.3) 4.5 (8.7) (6.9) 77.9 79.2 0.1 (1.0) 22.3 19.5
Latvia (3.8) 2.8 (4.5) (4.0) 35.0 37.6 1.5 0.4 49.6 47.0
Lithuania (0.9) 2.5 (7.6) (6.3) 36.8 41.7 7.5 6.0 20.1 15.3
Poland (2.8) 3.8 (9.3) (5.1) 55.9 58.7 3.0 0.8 27.6 22.1
Romania (5.2) 4.0 (9.2) (7.2) 43 49.3 (4.5) (5.1) 34.1 37.9
Slovenia (7.2) 5.0 (8.6) (6.2) 59.6 63.2 5.8 4.9 56.2 45.2
Slovakia (6.0) 4.3 (7.0) (6.0) 52.5 55.9 (1.7) (1.4) 50.8 47.1
GG—General government. CAR—Current account receipts. Source: S&P Global Ratings.
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Related Research
– Sovereign Debt 2021: EMEA Emerging Markets Borrowing To Remain Elevated Versus Pre-Pandemic Levels, March 1, 2021
– Sizing Sovereign Debt And The Great Fiscal Unwind, Feb. 2, 2021
– European Developed Sovereign Rating Trends 2021, Jan. 28, 2021
– Global Sovereign Rating Trends 2021: Mounting Debt And Uncertainty Underpin A Negative, Outlook Bias, Jan. 27, 2021
– EMEA Emerging Market Sovereign Rating Trends 2021, Jan. 27, 2021
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Analytical Contacts
18
Ludwig Heinz
Associate Director
+49 69 33 999 246
Karen Vartapetov
Director, Lead Analyst
+49 69 33 999 225
Gabriel Forss
Associate Director
+46 8 440 5933
Niklas Steinert
Associate
+ 49 69 33 999 248
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