By Sebastian Tong and Carolyn Cohn
LONDON, Oct 8 (Reuters) - As the global financial crisis
sends many emerging markets into tailspin, Eastern European
economies are seen as most at risk from unstable exchange rates
and a resulting foreign debt exposure of indebted corporates.
Latvia and Ukraine are seeing their currencies strain
against targeted trading bands and debt insurance costs soar.
And with Iceland's shocking plunge into a financial crisis
this week intensifying market worries over other emerging market
flashpoints, there has been widespread scrutiny of countries
running current account deficits with large foreign debt.
South Korea and Pakistan are feeling the heat in Asia as
their external deficits flag concern. And Latin America, even
though regional bourses were down more than 10 percent on
Wednesday, has much healthier external national accounts.
But Central and Eastern Europe sticks out and the
International Monetary Fund on Wednesday forecast the collective
current account deficit for the region to rise to a whopping 7.2
percent of total gross domestic product from 7.1 percent this
year and more than twice the shortfall as recently as 2002.
"Eastern Europe is the most exposed region among emerging
economies. These countries have large external financing needs
and the global environment looks more challenging than ever,"
said Edward Parker, head of Emerging European sovereigns at
Fitch Ratings.
Brown Brothers Harriman data showed Bulgarian and Estonian
external debt at 101 percent of GDP, with Hungary's debt at 96
percent.
"Virtually all (Eastern European economies) are running
current account deficits...many have very high external debt/GDP
ratios. In this region, the International Monetary Fund may end
up playing a significant role, particularly with the smaller
Baltic countries," it said.
A Credit Suisse table of countries showing most
macroeconomic risk leads with Iceland, following by Bulgaria,
Estonia, Lithuania, Ukraine, Latvia, Romania and Hungary. South
Africa is 10th, below the United Kingdom.
The table of risk rankings includes among its criteria the
estimated balance of payments for 2009, and ratios of private
sector credit and net external debt to GDP.
"If in the event that counterparty risk should spread from
corporates to sovereigns, the countries among the most at risk,
in our view, would be Bulgaria, Estonia, Lithuania, Ukraine,
Latvia, Romania, Hungary and South Africa," Credit Suisse said
in a client note, adding that Russia was at the lower end of the
risk spectrum.
PEGS TO GO?
Macroeconomic instability is being further exacerbated by
the massive unwinding of high-yielding positions by investors
seeking the relative safety of the U.S. dollar and Japanese yen.
Emerging currencies have skidded to multi-year lows,
worsening the foreign debt burden for some countries but only a
handful of central banks in the world have the firepower to
defend their currencies.
The cost of market intervention is already eroding the
reserves of Russia, which saw its over $550 billion gold and
foreign exchange reserves fall by about $25 billion in September
alone.
The Baltics -- already in recession -- are seen especially
vulnerable to a sharp depreciation in their currencies which are
fixed to the euro in currency board regimes.
"The Baltic states with pegged exchange rates are living on
borrowed time," said Nigel Rendell, senior emerging markets
strategist at RBC.
"With current account deficits of their magnitude and
inflation rates of 10-20 percent, something has to give."
The Latvian lat has been trading near the floor of its
trading band against the euro <EURLVL=>, hitting 0.7094 on
Wednesday compared with a floor of 0.7098.
Ukraine saw its hryvnia currency <UAH=> fall to a record low
on Wednesday past the lower end of its trading band, prompting
the central bank to intervene a day after widened the band to
accommodate increased volatility.
Mounting concerns over its highly leveraged banking sector
have sent five-year credit default swaps (CDS) for Ukraine above
900 basis points.
"Ukrainian CDS have decoupled from everything else at this
rating level. Economic fundamentals are horrible in Ukraine and
are likely to be so until the second half of 2009," said Luis
Costa, emerging debt strategist at Commerzbank.
(For "ANALYSIS-Baltics, Balkans brace for hard landing",
double-click on [])
(Reporting by Sebastian Tong and Carolyn Cohn; Editing by
Ron Askew)
