IFR Emerging Europe and Turkey Special Report 2014

IFR Emerging Europe and Turkey Special Report 2014
4 min read

This report reaches you at a time when Emerging Europe and Turkey could be stuck on the tarmac. The political situation means Ukraine is grounded and Russia may yet have to consider an emergency landing, yet the rest of the CEE region appears to be about to take off.

Placing regional politics to one side, the capital markets have begun the ascent as the clouds part to reveal an increasingly bright economic outlook. The technical imbalance between supply and demand is giving issuers huge pricing power, with recent deals from Latvia and Romania both priced at tight levels.

Even Turkey, battered by stormy headlines, has had no problems funding itself, with its deals in dollars and euros all receiving a tremendous reception. Now the country’s banks are beginning to access the capital markets as pricing becomes more attractive.

So, while political risk has been the dominant theme in region this year, investors continue to play.

In some instances, money is being recycled from the riskiest markets, politically speaking, to less risky. Even Turkey is benefiting from money flowing out of Russia.

Conditions are improving. After struggling to emerge from the deleveraging trap following the financial crisis, the region ex-Russia and Turkey is expected to grow by 2.3% this year, according to the IMF. That may seem small compared with some other emerging economies, but it’s still almost twice that of last year.

Investors should remain wary, however. As the IMF said in its spring Regional Economic Issues Report: “An unusual constellation of risks clouds the outlook.” And it wasn’t just referring to the geopolitical tensions in Ukraine. The gradual unwinding of monetary stimulus in the US and potential deflationary risks in the eurozone pose problems too.

Moreover, not every economy in the region is flying on an even keel and some could face turbulence. Croatia, for example, is still struggling to escape from recession; Serbia’s incoming administration needs to agree an IMF programme; and in Slovenia, the prime minister lost a party leadership election.

As ever there will be winners and losers. A look at three stock exchanges – Warsaw, Bucharest and Vienna – shows a remarkable shift as the man with the Midas touch, Ludwik Sobolewski, is reforming the Bucharest Stock Exchange, while Warsaw’s loses its grip.

Even within Austria, with its punctilious loyalty to nations east of Vienna and west of Moscow, there is no one-size-fits-all strategy, as evidenced by Erste Bank’s Ukrainian exit and Hungarian concerns; and by Raiffeisen’s determination to squeeze every drop of profit out of a half-dozen strategic markets.

Growth has picked up faster in CEE than in the eurozone, and the average debt-to-GDP ratio stood at 55% at end-2013, against 93% for the eurozone.

“In the long term, [CEE] will be the region with the best growth prospects in Europe,” said Austria’s central bank in its January 2014 outlook, noting that operations across the eastern half of Europe would generate higher profits for Austrian lenders than purely domestic operations.

But keep the parachute handy, as loan volumes have yet to catch up with the region’s revival. Total profit generated by Austrian lenders across the region in the first half of 2013 was €1.4bn, flat to the previous year, according to National Bank of Austria data. Moreover, the bulk of earnings were sourced in just two markets, Russia and the Czech Republic.

A number of countries remain vulnerable to external shocks because of their relatively high stock of external debt. Further structural reform remains of paramount importance.

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