This year should bring positive rating actions for southeastern Europe, negative action for Poland

‘Is there any chance for rating change this year?'

Croatia: Following S&P's revised outlook at the very end of last year, Croatia also started 2017 on a good note, with Fitch upgrading its outlook to ‘stable', while keeping the rating unchanged at ‘BB' (fully in line with S&P's call). Moody's should be next in line with its assessment during 1Q17; we see room for an upgrade on the outlook side as well, given that Moody's currently has it at ‘negative'. Looking ahead, the healthier fundamental picture favors a more optimistic view regarding the rating agencies' stance, with stronger growth momentum, an improving fiscal position and restored stability laying solid ground for a continuation of the positive rating news flow throughout this year, while the expected EDP suspension would also come as a tailwind. In our baseline scenario, we expect to see at least the outlook further improving to ‘positive', while we would not rule out an upgrade by a notch by some of the rating agencies.

Czech Republic: We see the rating outlook as stable in the mid term. The development of the Czech economy is favorable, with an extremely low unemployment rate (3.6% according to ILO methodology and slightly above 5% according to Ministry of Labor methodology), while fiscal surprises tend to be on the positive side and the economic outlook is positive. Public opinion is not putting any significant pressure on the government, which will probably smoothly continue with its current policy after the autumn parliamentary elections, with no unexpected swings.

Hungary: All three major credit rating agencies raised Hungary back to investment grade with a stable outlook last year, thanks to the stable budget and decreasing gross public debt to GDP ratio. In addition, the agencies underlined that the 2-4% annual GDP growth rates since 2013 also strengthened the case for an upgrade. However, the agencies deem the Hungarian potential GDP growth rate weak compared to its peers in the CEE region. Therefore, unless the government carries out measures to improve competitiveness to raise potential GDP growth, it is very unlikely to see further upgrades. We do not expect either an upgrade or an outlook improvement this year, as no such measures are in the pipeline and the fiscal loosening this year is also an argument against such a move.

Poland: This year, we see a rating and/or outlook adjustment by Moody's as a likely scenario. In May 2016, Moody's decided to change the outlook to negative, following the S&P decision to downgrade Poland. Since then, some changes, such as the lack of a forced FX loan re-denomination, were seen as credit-positive by Moody's, while other reforms, such as the cut in the retirement age, were said to be credit-negative. Public finances, however, have not deteriorated more visibly and the budget deficit remains below the fiscal limit of 3% of GDP. However, the current rating of Moody's is two notches above that of S&P and one notch above that of Fitch, making the downgrade somewhat more likely than bringing the outlook back to stable (the next rating decision is due in May).

Romania: Romania is currently rated at investment grade with a stable outlook by the major rating agencies. We see the current ratings as properly balanced at present and our baseline scenario is that there will be no change in 2017. Romania's rating is supported by its robust economic growth, low public debt, manageable external indebtedness, low inflation environment and stable banking sector. On the other hand, risks related to a recent widening of the budget and current account deficits are on the rise, led by fast expansion of wages and consumption. If such risks were to materialize in a more dramatic fashion than seen in the recent years, rating agencies are likely to react. However, this would be a discussion for 2018 and beyond, especially as the rating agencies tend to react with a lag to worsening fundamentals.

Serbia: The better than expected economic performance in 2016 (consensus forecasts at YE15 stood at 1.5% y/y, flash estimate for FY16 at 2.7% y/y) and significant improvement in the fiscal position (with the general government deficit landing at 1.4% of GDP vs. the 4% of GDP initially planned and 2.1% of GDP IMF target after the sixth revision in December) suggest that we should see some positive tones from the rating agencies.
Primarily, we expect that Fitch could raise its outlook from stable to positive already in the first assessment in June, aligning with the other agencies. As for the hikes in ratings, we expect the agencies to take a cautious stance and monitor the performance of the Serbian government till the end of the year, as they will await the election results (potential snap elections as well), while some structural reforms are still lagging behind. If the government shows progress on the reform agenda and the political situation does not bring any uncertainties, we could see a potential one-notch upgrade in rating from Moody's or S&P in November/December 2017.

Slovakia: Slovakia has an investment grade rating with a stable outlook by all major rating agencies (S&P: A+, Moody's: A2, Fitch: A+). We do not expect any rating change this year. Public finances are in check and sovereign debt is expected to fall over the next few years, aided by good economic growth and the still accommodative monetary policy of the ECB. The banking sector is stable and Slovakia remains an attractive destination for FDI. However, in the most recent view on the Slovak economy, S&P noted some obstacles to a possible further rating upgrade. These relate to structural issues such as regional disparities, an aging population and high long-term unemployment.

Slovenia: The solid and stable economic performance and expected gradual acceleration of the growth figure (mainly due to a new EU investment cycle), positive fiscal developments (deficit moving to around 2% of GDP) and successful stabilization of the banking sector make Slovenia a solid candidate for the 'awards' from the rating agencies. In addition, Slovenia's minister of finance was pronounced a sovereign risk manager of the year by Risk.net, as its treasury improved the public debt outlook notably by swapping USD-denominated debt to cheaper and longer EUR debt, thus reducing interest expenses by around EUR 70mn. All that said, we could see a positive move from Moody's, which holds Slovenia at Baa3 (below the comparable rating of the other two agencies), and Fitch aligning with other agencies by increasing the outlook from stable to positive.

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