Despite the almost all-pervasive sense of optimism among many market players, there’s still the risk in central and eastern Europe of an Asian-style debt crisis that ravaged emerging markets a decade ago, leading analysts have warned.
Ed Parker, head of emerging Europe sovereign group at Fitch, told Emerging Markets: “There’s always the danger that complacency can set in after the sort of sustained economic boom we’ve seen in recent years.”
The macroeconomic fundamentals in the region are strong and the global environment remains generally supportive, even after rate hikes by Jean-Claude Trichet’s ECB. Still, Parker said substantial external financing requirements in some states in central and eastern Europe mean they are more exposed to any abrupt tightening in global liquidity.
Central and eastern Europe is particularly vulnerable given its external financing needs, which Fitch forecasts at $217 billion in 2007 — by far the largest of any emerging market region.
The Baltic states, Croatia, Hungary and Turkey are at greatest danger from any increase in bearish market sentiment, according to Parker. He conceded that for the moment the general economic outlook for the region is good, but says that there are concerns, “Sovereign credit ratings in emerging Europe have risen further over the past 12 months, with seven upgrades and no downgrades.”
But Parker said that only three countries in the region are on positive outlook — Armenia, Kazakhstan and Ukraine — while Hungary and Latvia are on a negative outlook.
In 2007 Fitch projects sovereign Eurobond issuance from emerging Europe at just $16 billion as governments continue to switch to domestic debt funding, but the private sector issued some $43 billion of Eurobonds in 2006 and $20 billion in the first quarter of this year alone.
“The scale of private sector borrowing is one of the major risk factors in the region,” Parker said.
Some countries have already moved to choke off any over-exuberant corporate borrowing. Kazakhstan for example has upped minimum reserve requirements to choke off the supply of new Eurobond issuance by the country’s banks.
“We fully agree with the central bank’s actions,” said Timur Ishmuratov, managing director of Bank CenterCredit, adding: “There is certainly a danger of oversupply which would bring increasing refinancing risk.”
Simonas Eimaitis, emerging markets debt syndicate manager at UBS in London told Emerging Markets: “Kazakh Bank Eurobond spreads have underperformed as a result of the ever increasing speed of issuance.”
Although EU convergence is a strong net positive for the region, Parker warned that political risks are on the rise in several countries, given election uncertainty, weak coalition governments, populism, reform fatigue and euro-skepticism.
Event risk is also an issue — Russia and Turkey face both parliamentary and presidential elections over the next 12 months, while Romania, Serbia and Ukraine are mired in political crises.