Moodyʼs: outlook for CEE sovereign creditworthiness ‘stable’

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“Dynamic household consumption and a continued recovery in investment will continue to drive growth in the CEE region,” says Daniela Re Fraschini, an associate vice president at Moody’s and author of the report. “This will help to further narrow the CEE region’s income gap with the remainder of the EU.”

Most rating and outlook changes for CEE sovereigns in 2017 were positive, driven by strengthening fiscal metrics, on the back of improving economic prospects, the agency says. As a result, and in line with the supportive credit environment that Moody’s foresees for CEE sovereigns in 2018, seven of the region’s eight sovereigns now have a stable outlook.

Moody’s expects that growth rates in the CEE region will continue to exceed EU and euro area averages in 2018, but will moderate slightly to between 3% and 4% for most countries. This is due to slightly lower expected growth in the euro area, and the start of gradual monetary tightening in some CEE countries.

The rating agency also expects that fiscal policy will remain expansionary in 2018 in most of the region. However, room for maneuver will shrink for many CEE states this year as revenue growth slows in line with moderating economic growth, and interest costs gradually rise, driven by the normalization of monetary policy.

Pressure for Romania and Hungary

Moody’s says this will exert pressure on the countries with the least favorable fiscal positions, like Romania and Hungary (both rated “Baa3 stable”), where structural deficits are set to widen further.

Despite the ongoing cyclical strength, Moody’s points out that structural impediments such as demographic challenges and labor shortages are weighing on the region’s potential growth.

Moreover, the need to adapt to future changes in the automotive industry, as well as shifting EU funding levels, might also pose challenges for the region’s medium to longer-term growth outlook, the agency warns.

In addition, the rating agency says that a less predictable policy environment will constrain the credit profile of some sovereigns in the region. In this context, policy unpredictability will remain relevant for Poland (“A2 stable”), where judicial reform could potentially erode the rule of law and dampen economic sentiment and FDI.

The report, entitled “Sovereigns – Central & Eastern Europe: 2018 Outlook Stable as Solid Growth Offsets Structural and Institutional Challenges,” is available on www.moodys.com. The research is an update to the markets and does not constitute a rating action, the agency stresses.