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Fitch: Stronger GDP Growth but Politics and Policy Risks for Emerging Europe in 2017
November 29, 2016 / 4:16 PM / 10 months ago

Fitch: Stronger GDP Growth but Politics and Policy Risks for Emerging Europe in 2017

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: 2017 Outlook: Emerging Europe Sovereigns here PARIS/LONDON, November 29 (Fitch) Emerging Europe sovereigns are set to benefit from improving economic prospects in 2017, but face an increase in political and economic policy risks, says Fitch Ratings. The outlook for emerging Europe sovereign ratings in 2017 is stable, but there are four Negative Outlooks and no Positive Outlooks, highlighting that risks to creditworthiness are on the downside. For the emerging Europe region as a whole, Fitch forecasts GDP growth to strengthen to 2.7% in 2017 from 1.9% in 2016. For central and eastern European (CEE), growth will be supported by a pick-up in EU disbursements, accommodative monetary conditions, and rising employment and real wages. The resumption of credit growth, following sustained deleveraging, will also support growth in some countries. Fitch forecasts a return to growth in Russia in 2017, though the pace of growth will remain subdued, at just over 1%, reflecting fiscal consolidation, tight monetary policy and structural rigidities. The recovery in Russia will provide a more favourable backdrop for trading partners, but its likely slow pace means that investment and remittance flows are likely to take longer to revive. With output gaps narrowing and commodity prices forecast to increase, Fitch expects inflation to rise in all CEE countries in 2017. We expect monetary authorities to balance loose ECB policy and possible political pressure to prioritise growth, against the need to maintain credibility given some reliance on foreign investment and progress in anchoring inflation expectations. Adherence to EU fiscal rules remains a strong anchor for many in the region. Nonetheless, increased spending will cause a general deterioration in underlying fiscal positions in 2017. Many countries are relying on offsetting new expenditure measures with faster growth and improvements in tax collection, areas that have disappointed in the past. Political developments, both inside the region and externally, could generate policy uncertainty and affect economic performance. Hostility to some EU policies, notable migration, has been coupled with greater populism in several CEE countries, creating tension with other EU members. Political uncertainty remains high in Turkey post-coup attempt. The fallout from the purge of the public sector should be more apparent in 2017. Constitutional reform has moved back up the government's agenda, and geopolitical tensions are also likely to linger. Fitch's outlook for Ukraine does not anticipate resolution of the conflict in the east or any escalation that would compromise overall macroeconomic performance, though tensions will continue to weigh on the economy. The bulk of the 21 sovereign ratings in emerging Europe have Stable Outlooks. However, there are four Negative Outlooks (Azerbaijan, Croatia, Macedonia and Turkey) and no Positive Outlooks. Key rating sensitivities in the region are political populism that could undermine the credibility of economic policy and greater trade protectionism. Further progress with external deleveraging without disrupting growth momentum could lead to positive pressure on ratings, particularly in CEE. A renewed fall in oil prices would put negative pressure on the ratings of the key producers in the CIS. Contacts: Paul Gamble Senior Director +44 20 3530 1623 Arnaud Louis Director + 33 144 299 14 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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