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CEE Quarterly

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Global financial and economic weakness testing CEE

Tue, Oct 7 2008, 15:39 GMT
by Yapi Kredi Bank Economic Research Department

Yapi Kredi Bank

One year after the beginning of the international financial turmoil, high uncertainty and volatility persist at the global level, with no signs of abating. The US economy continues to perform poorly and signs of a slowdown are now materialising also in the eurozone. Strong inflation and declining employment are taking their toll on households’ spending, while a low level of construction activity – likely to persist for the whole forecasting period – will reflect the weakening capital formation until mid-2009, which will in turn slow down investment. With a large share of CEE exports being directed towards the eurozone which is experiencing declining growth, the situation is anything but favourable for CEE.

The financial sector crisis is deepening, moving from the US to the UK and to Western Europe. Stock markets have been dropping for weeks, liquidity is becoming an issue for the financial industry, while risk aversion is increasing sharply. Such a scenario is clearly unsupportive for emerging markets and for CEE.

The repricing of CEE market risk has clearly intensified in line with global trends. The 5Y CDS spread, though being a quite illiquid measure in some of the countries, is peaking, and strongly penalising those countries which show macroeconomic imbalances (see chart 1). The CDS spread for Ukraine is now trading at more than 700 bps, while the spread more than doubled in the last month in Kazakhstan, Russia and

Latvia (now at 430, 254 and 330, respectively). Risk pricing, although already high, also increased in South Eastern European countries (CDS spreads are currently above 200 bps in Romania, Bulgaria and Serbia) and Turkey, where CDS spreads are now close to 300 bps. While Central European countries have also been affected by a surge in CDS spreads in the last month, they continue to enjoy a relatively lower risk perception than other countries in the region and – with the exception of Hungary – their CDS spreads are far below 100 bps.

Going on declining world growth will reflect the high uncertainty, volatility and strong risk aversion characterising international markets, with a negative effect on international capital flows.

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Published on  Tue, Oct 7 2008, 15:39 GMT