(The following statement was released by the rating agency)
Feb 24 - The resilience of Eastern European economies seems
to be crumbling under the weight of high foreign currency debt
and the potential reprioritization of lending among foreign
banks, says a report titled "Market Dislocation Exposes
Vulnerability Of Eastern European Economies," published
yesterday by Standard & Poor's.
"The financial crisis that started to hit developed
economies after August 2007 did not immediately affect East
European economies," said Jean-Michel Six, Standard & Poor's
chief economist for Europe. "In fact, through the first half of
2008 their economic prospects still appeared resilient. But in
the second half of 2008, the effects of the crisis started to
filter through the region and are now gathering momentum."
As the report points out, economic factors evident in
Eastern Europe at present appear worryingly similar to those
leading up to the Scandinavian recession of the early 1990s.
They include:
-- The liberalization of local financial markets and an
attendant boom in the growth of credit.
-- A growing reliance on foreign lending, reflected in a
sharp deterioration in the current account deficit and a
corresponding decline in the domestic savings rate.
-- An initial lack of response in the currency exchange
rate to a growing current account deficit leading to a currency
crisis.
All Eastern European economies currently embody one or more
of these symptoms, suggesting that the ingredients of a
significant regional crisis are in place. Yet the magnitude of
the problems differs across the region, leading to a
diversification in the outlook for individual countries.
Essentially, these economies fall into two distinct groups:
-- The Czech Republic, Poland, and Slovakia. Despite
declining GDP growth, the Czech Republic looks likely to
weather the current crisis better than most thanks to resilient
private consumption and comparatively strong economic
fundamentals. We believe the slowdown in 2008, with GDP growth
declining to 4.1% from 5.9% a year earlier, will continue in
2009 on the back of very weak export growth. Similarly, while
Poland will continue to suffer from weak foreign demand and
from the effects of the financial crisis on investment, private
consumption is likely to hold up thanks to low inflation and
cuts in personal income tax.
We believe Poland's GDP growth will decline to 1.5% in 2009
from 5.0% in 2008. Slovakia's membership of the Eurozone should
give the economy additional protection in the current crisis,
but we expect Slovak GDP growth to fall to 2% in 2009 from 7%
in 2008. Nevertheless, there is an increasing risk to the
economy from Slovakia's high exposure to the auto sector.
-- The Baltic states (Estonia, Latvia, and Lithuania),
Bulgaria, Hungary, and Romania. For this group the level of
economic vulnerability is high. The Baltic states face
significant external financing requirements that make them
highly vulnerable to a cut-off in capital flows. Each maintains
a currency board (except for Latvia), and the pegs to which
their currencies are linked remain under heavy pressure, as
they have since the middle of last year. Bulgaria's main
vulnerability, meanwhile, remains its massive current account
deficit. As foreign financing becomes much tighter, the
Bulgarian economy is likely to experience a painful period of
adjustment in 2009 and 2010, with GDP growing about 1% this
year and close to 2% in 2010, and a negative growth scenario
cannot be excluded. A similar rationale applies to Hungary,
where we expect GDP to decline by 2.5% this year before
experiencing a mild recovery of 0.5% in 2010. Romania, once one
of the economic high-fliers, is also poised to slow sharply in
2009. After an impressive 7.3% in 2008, we believe GDP growth
will plummet to 0.8% this year.
