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BELGRADE (Serbia), August 23 (SeeNews) – The countries in Central, East and Southeast Europe (CESEE) may be affected by a further rise of US interest rates and the Turkey panic may just be the first indication of a broader sell-off of emerging market currencies, the Vienna Institute for International Economic Studies (WIIW) said.
Many CESEE countries have significantly increased their external debt loads over the past decade, some continue to run large current account deficits, while a few countries in the region could also be vulnerable from a sovereign debt perspective, the WIIW said in a press release.
One key indicator of vulnerability is external debt, as much of CESEE has participated in the ramping up of external corporate credit since 2008, as firms have taken advantage of ultra-low borrowing costs, the WIIW said. "Gross external debt/GDP ratios have risen across most of CESEE since 2009, with the biggest increases recorded in the Czech Republic, Ukraine, Belarus, Albania and Macedonia (all 25pp of GDP or more as of end-2017)."
In terms of the overall levels, Ukraine, Kazakhstan, the Czech Republic, Croatia and Hungary stand out. Short-term external debt is notably high in the Czech Republic, Kosovo, Turkey and Belarus, although in the past decade most countries have reduced their reliance on short-term debt. Corporate eternal borrowing was particularly high in Kazakhstan (88% of GDP at end-2017), but was also elevated in Croatia, Macedonia, Bulgaria and Ukraine, the institute also said.
A second key metric to access external vulnerability is the current account deficit adjusted for net foreign direct investment (FDI) inflows, WIIW noted. CESEE had undergone a positive adjustment since the global financial crisis but several countries are still running FDI-adjusted current account deficits. Some of them, particularly Kosovo and Bosnia, were able to rely on a large share of concessional financing, this was clearly not the case for Turkey in particular, which relied heavily on “hot money” to plug the gap.
The three major rating agencies have a particularly positive outlook on the region’s sovereign debt, but public debt/GDP ratios rose in almost every country in the region over the past decade, with Montenegro, Albania, Serbia, Hungary, Slovenia, Ukraine, and Croatia standing above 60% in March, the WIIW said.
However, US tightening is expected to proceed only slowly from here, while the pace of rate hikes by the European Central Bank is likely to be even more sluggish. This will provide a valuable source of stability for the more vulnerable countries in CESEE over the coming years.
Investors should not be complacent about the risks in CESEE, as market activity of recent weeks has shown, but some of the worst fears are overblown. In particular, there is a fairly strong likelihood that global rates will continue to only rise slowly.