Balkans facing economic risks
The fast-growing Balkan economies are increasingly at risk of overheating, with burgeoning asset prices and trade deficits jeopardizing economic stability, said Standard & Poor’s Ratings Services in a series of new reports on the region. «This will require a prudent response by policymakers, especially because tighter global liquidity conditions loom and political risks are on the rise as the end game for the resolution of the final status of Kosovo has begun,» said Standard & Poor’s credit analyst Moritz Kraemer in the article «Rejoining Europe’s Mainstream: A Dynamic Balkan Region is Making up for Lost Time.» A soft landing supported by prudent policies would also benefit prospects of EU accession, which most of these sovereigns target for the first half of the 2010s, said Kraemer. Rising deficits In the report «Credit FAQ: Growing Pains, as External Vulnerabilities Emerge for Bulgaria, Romania and Croatia,» Standard & Poor’s argues that the risk of overheating for these three sovereigns has been rising significantly during recent years, although price increases have been moderate as surging imports have kept a lid on inflationary pressures. But as the current account deficits have reached unsustainable levels in Bulgaria (BBB+/Stable/A-2) and Romania (foreign currency BBB-/Stable/A-3), although somewhat less so in Croatia (foreign currency BBB/Stable/A-3), this economic high-pressure valve is unlikely to be able to keep overheating pressures in check for much longer before prices begin to rise markedly. A forceful countercyclical fiscal stance is key to minimize the risk of a hard landing, the report argues. «Progress on that front is uneven among the trio, with Romania lagging in fiscal rigor, although this is partly balanced by a more flexible monetary policy,» said Standard & Poor’s credit analyst Remy Salters, author of the report. «A policy mix cooling down excessive domestic demand is therefore crucial to minimize the risk of asset and debt bubbles emerging and bursting, bringing the real economy down in the process.» External imbalances A further report, «Rising Imbalances Hold Back Sovereign Ratings in the Western Balkans, while the Kosovo Question Looms Large,» addresses related problems in Serbia (BB-/Stable/B), the Former Yugoslav Republic of Macedonia (foreign currency BB+/Stable/B), and Montenegro (BB+/Stable/B), and unrated Albania and Bosnia. Although overall growth prospects have improved (real GDP growth in the region averaged 6 percent in 2006, and is projected to continue at a similar level in 2007), and fiscal consolidation has advanced, the sovereigns’ external liquidity has deteriorated, owing to persistent trade deficits fueled by rapid credit growth. «As a result, large external imbalances have accumulated, constituting the primary credit weakness across the region,» said Standard & Poor’s credit analyst Sladana Tepic. These articles are included in the Special Report «Re-emergence of the Balkans as an Economic Force,» available on RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis.
