Fitch Ratings published a report this week analyzing the fiscal deterioration taking place in 21 countries in what it calls “Emerging Europe,” which includes three sizable economies — “rising” power Russia’s nearly $1.7 trillion economy, struggling Turkey’s $745 billion economy, and Poland’s nothing-to-sneeze-at $525 billion economy. Like much of the rest of the world, Emerging Europe juiced its economies with fiscal stimulus packages due to the Great Recession, and therefore, needs an exit strategy over the medium term to this fiscal deterioration. 

Fitch rates Russian sovereign debt at BBB with a Negative Outlook (likely to be downgraded within two years); Turkey’s BB- with a Rating Watch Positive (likely to be upgraded, albeit from a low level, within the next three months); and, Poland’s debt A- with a Stable Outlook.

Fitch expects Polish GDP growth to languish before rebounding to about 3% in 2011; Russian growth to creep back above 3%; and, Turkey’s to move back to around 4% per year.  Government deficits in all three will remain sizable at between 3-6% of GDP per year, though quite small next to America’s 10% this year.  Poland’s government debt will rise to nearly 60% of GDP by 2011; Russia’s government debt remains very, very small (at below 15% of GDP); and Turkey’s will rise to nearly 50% of GDP before plateauing.  These levels are still modest relative again to U.S. levels approaching 90% in the coming years.  Poland’s and Turkey’s current account balances (a measure of trade) are in deficit, though forecast by Fitch to be below U.S. levels, which should exceed 3% of GDP in the coming years.  Russia, of course, as an energy exporting powerhouse, remains in surplus on its current account.

Central European economies, including Poland’s, are expected to move out of recession nicely, driven by links to the euro area, especially to the reviving German economy.  Baltic and Balkan states are rebounding less nimbly, according to the Fitch report.

A number of countries have been assisted by sizable IMF financing, including Turkey, Hungary, Armenia, Georgia, Latvia, Romania, Serbia and the Ukraine, not to mention that Poland obtained a $20.5 billion Flexible Credit Line with the IMF.    

Have a look at the Fitch Press release on the report below. 

Fitch: Public Finance Concerns Move to the Fore in Emerging Europe
29 Oct 2009 4:00 AM (EDT)

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Fitch Ratings-London-29 October 2009: Fitch Ratings says in a new report that although external financing risks have eased somewhat for many countries in emerging Europe (EE) during recent months, rising government deficits and debt ratios mean that sovereign rating dynamics remain negative.

“Worst fears of a systemic economic and financial meltdown in emerging Europe have receded as global output has started to recover and financial conditions have eased, driven by the massive global fiscal and monetary policy stimulus, rescue packages led by international financial institutions and, in many countries, impressive economic resilience,” says Edward Parker, Head of Emerging Europe Sovereigns at Fitch.

“However, major challenges remain due to the scale of the negative shocks to hit the region; the costly legacy of the crisis, notably rising public debt ratios; and the uncertain “exit” from the crisis, recession and accommodative policy settings; while a relapse in one of the more vulnerable countries could trigger ripples across the region,” says Mr Parker.

Concerns over public finances have moved to centre stage. Fitch forecasts the impact of the recession - in some cases augmented by fiscal stimulus measures, lower oil prices and bank bail-outs - to widen the average budget deficit to 5.9% of GDP in 2009 from 1.1% in 2008, before narrowing to 4.6% in 2010. It expects the average government debt/GDP ratio to rise to 36% at end-2010 from 23% at end-2007. Failure to implement credible medium-term fiscal consolidation could lead to rating downgrades. In many countries, social pressures and elections will make it harder to implement austerity measures. This is fertile territory for political shocks. For countries reliant on IMF-led programmes for fiscal and external financing and for underpinning economic confidence, failure to stick to programme conditions poses additional risks to macroeconomic stability.

Fitch has revised its forecast for 2009 EE GDP to -6.1% from -4.6% in its June forecast round, owing to an even steeper drop than anticipated in output in H109. This contrasts with just -0.1% forecast for emerging markets as a whole. It forecasts only Azerbaijan and Poland will avoid recession, while Armenia, Estonia, Latvia, Lithuania and Ukraine will suffer double-digit declines in GDP. However, it has revised up its 2010 growth forecast to 2.6% (from 1.5%), owing to the unwinding of the deeper 2009 contraction and more supportive global conditions. Indeed, it estimates EE GDP rose by about 1% q-o-q in Q209, after plummeting 7% in Q109, led by a rebound in Turkey. But weak investment, rising unemployment, moderate capital inflows and credit growth, fiscal consolidation and a rebuilding of balance sheets point to a subdued recovery.

External financing and currency risks, which were the primary vulnerability of many countries in EE in the initial phase of the crisis, have eased somewhat, though remain material. This reflects a rapid reduction in current account deficits (CADs), substantial multilateral assistance, a boom in sovereign external issuance (USD19bn year to date) and relatively resilient private-sector roll-over rates. Fitch estimates the region’s gross external financing requirement (CAD plus medium- and long-term (MLT) amortisation) at USD304bn in 2009 and 2010, down from USD363bn in 2008.

In contrast to the rally in EE government bond prices, sovereign ratings dynamics remain negative, albeit at an easing pace. Following 11 notches of downgrades of foreign-currency Issuer Default Ratings in Q408, there were two downgrades in Q109, three in Q209 and only one in Q309. The balance of Outlooks and Watches has improved slightly since August 2009, but 12 countries are on Negative and only one on Positive. Fitch expects future rating actions to be driven more by country-specific developments than general trends.

The full report, entitled “Emerging Europe Sovereign Review: 2009″, is available on the agency’s website at www.fitchratings.com

Contacts: Edward Parker, London, Tel: +44 (0) 20 7417 6340, David Heslam, +44 (0)20 7417 4384; Eral Yilmaz, +44 (0)20 7682 7554.

Sovereign risk in Turkey was once talked about in the same breath as Brazil’s.  Not so anymore.  One is going hat in hand to the IMF, likely to get $45 billion in the coming weeks; the other is largely self-financing.  What went wrong in Turkey?  Always keep your eye on the current account deficit, folks, even when Wall St. analysts tell you its nothing to worry about because it’s financed by FDI, or some such Bernanke-esque bunk.  Current account deficits mean borrowing from abroad.  And that means vulnerability.  Turkey went into the global crisis with a 5-6% current account deficit, while Brazil went in with small surpluses.  Keep your eye on America as well and its sovereign credit risk — current account deficits there have been nearly halved to 2-3% from 5-7% a couple of years ago, largely due to the US recession.  But the U.S. still can’t kick its foreign borrowing habit, Obama’s protectionism notwithstanding.  Likewise, watch out for “twin deficits.”  That’s when government deficits move in tandem with current account deficits (the former often driving the latter).  The US has these, as does Turkey (where government deficits are in the range of 5-7% of GDP, versus Brazil’s 3-4%).  Turkey’s overall government debt burden remains modest at under 50%, versus Brazil’s near-70%; however, Brazil’s government debt burden is headed down, while Turkey’s is rising.  Hence, Fitch moved Brazil up to investment grade not long ago, while Turkey languishes at BB-.  They both were BB- only a few years ago.  Sometimes the rating agencies get it right, even though it often takes them some time to do so.

So, the Turkish prime minister shows up hat in hand at the IMF’s doorstep, while President Lula’s Brazil is considered a rising power.  Have a look below at the CreditSuisse report from today on Turkey’s negotiations with the IMF.  Deputy Prime Minister Babacan, whom I met with in the past and perceive as smart and wily, is thankfully in charge of these negotations.

From CreditSuisse:

Turkey
Berna Bayazitoglu
+44 20 7883 3431
berna.bayazitoglu@credit-suisse.com
Prime Minister Erdogan denounced yesterday the claims in the local media that the IMF has offered a sizable financing package to the Turkish government which it cannot turn down. As we reported in the Emerging Markets Economics Daily yesterday, Erdogan told the Wall Street Journal on Monday (5 October) that the Turkish government has resolved one of the sticking points with the IMF, namely the IMF’s request for an independent tax revenue administration, and added that “he would like to see a new IMF program for Turkey agreed soon.” This was the most upbeat assessment that Erdogan has offered on the subject in a long while. Looking for an explanation for the change in Erdogan’s tone about an IMF agreement, the Turkish media claimed yesterday morning that the IMF might have offered a large financing package to Turkey (amounting to $45bn) which Erdogan cannot turn down. However, at a reception later in the day, Erdogan denounced local media stories that the IMF has made a new offer to Turkey.

Nevertheless, Erdogan’s statements in the Wall Street Journal add strength to the possibility that the government might invite an IMF mission to Turkey soon. As we noted in the Emerging Markets Economics Daily yesterday, speaking at various conferences in the last few days at the IMF/World Bank annual meetings in Istanbul and somewhat in contradiction to Erdogan’s statements in the Wall Street Journal, Deputy Prime Minister Babacan (who is the senior policymaker in charge of policy discussions with the IMF) had said that the discussions on the tax revenue administration and local governments’ spending were still continuing and that the IMF was studying the government’s medium-term economic plan and fiscal program.

The Statistics Office will release the industrial production data for August tomorrow. We forecast that industrial production was down 4.7% yoy in August, slowing from a contraction of 9.1% yoy in July. Our forecast is more optimistic than the consensus forecast (according to Bloomberg) of a 5.2% yoy contraction.

The NYTimes published an article today detailing a set of energy deals concluded between Russia and Turkey in Ankara, with Prime Ministers Putin and Erdogan present.  The deal was with Russian energy giant Gazprom, allowing state-owned Gazprom access to Turkish territorial waters, a benefit Russian czars and party chairmen since Peter the Great (pictured above — who ruled Russia from 1682-1725) have sought by force (or threat of force).  Now, in true “Western” fashion, Russia, Inc. is signing a business contract that provides benefits to Turkey as well.  Turkey desires to become an energy hub and has obtained a Russian commitment to build a pipeline across its territory.

The Times article explains how Western interests have competed with Russia for energy agreements with Turkey in order to avoid Russian dominance of the Eurasian energy pipeline system, and the consequent vulnerability of energy-hungry Western Europe.  Russia has used pipeline cutoffs before for political purposes, e.g. with the Ukraine.

Turkey for its part, with a less pro-Western government than heretofore, headed by the moderate Islamist AKP party, probably does not mind playing what the Brits over a century ago called, “the Great Game,” or the Great Power competition in the East.  Has Vlad the Great bested Peter??

Secretary of State Hillary Clinton spoke today at the Council on Foreign Relations in Washington, DC. She emphasized the centrality of the United States and the importance of cooperation. Even though no country can solve global challenges alone, “no challenge can be met without America.” Working with the world’s rising powers – including China, India, Russia, Brazil, Turkey, Indonesia, and South Africa – is essential as “these states are vital to achieving solutions to the shared problems and advancing our priorities.”

“Now, some see the rise of other nations and our economic troubles here at home as signs that American power has waned. Others simply don’t trust us to lead; they view America as an unaccountable power, too quick to impose its will at the expense of their interests and our principles. But they are wrong…

“America will always be a world leader as long as we remain true to our ideals and embrace strategies that match the times…

“Our approach to foreign policy must reflect the world as it is, not as it used to be. It does not make sense to adapt a 19th century concert of powers, or a 20th century balance of power strategy. We cannot go back to Cold War containment or to unilateralism…

“In short, we will lead by inducing greater cooperation among a greater number of actors and reducing competition, tilting the balance away from a multi-polar world and toward a multi-partner world…

“We will also put special emphasis on encouraging major and emerging global powers – China, India, Russia and Brazil, as well as Turkey, Indonesia, and South Africa – to be full partners in tackling the global agenda. I want to underscore the importance of this task, and my personal commitment to it. These states are vital to achieving solutions to the shared problems and advancing our priorities – nonproliferation, counterterrorism, economic growth, climate change, among others. With these states, we will stand firm on our principles even as we seek common ground.”

For more, check out coverage in the FPA’s Africa Blog.

Photo from AFP/Karen Bleier and clip from MSNBC.

Since President Wilson enunciated his Fourteen Points during World War I, the principle of national self-determination has been an objective of the Western Powers.  The plethora of weak national states in Eastern Europe in the interwar years, and the temptation this gave a revanchist Germany to invade and a greedy Soviet Russia to divide the spoils tempered to some extent postwar Western support of national self-determination.  It remains a principle the world community supports…however selectively.

An interesting NYTimes article discusses the national aspirations of less than 100,000 ethnic Abkhaz in Georgia, a nation of 4.7 million (mostly ethnic Georgians), which finds itself hosting NATO exercises and therefore in a tense relationship with neighboring Russia.  Russia recognizes the independence of Abkhazia and South Ossetia.  Most every other nation in the world does not. 

The conflicts there are complex, with poor judgment taking place on both sides.  Abkhaz nationalists are seeking to attract some 500,000 Abkhaz living in Turkey to return and help build an independent state.  Ottoman Turkey invaded Abkhazia in the 16^th century and converted the local population to Islam (versus the Orthodox Christianity of ethnic Georgians).  Interestingly, it seems much of the Abkhaz diaspora had fled Georgia in the 19^th century to escape the rule of an expanding Czarist Russia.  Russia is now of course the principal benefactor of Abkhaz separatists.

So, where does our moralistic support of national self-determination of peoples begin and end?  The Abkhaz and South Ossetians? The Chechens? The Basques of Spain and France? The Kosovar Albanians?  The Palestinians?  The Tibetans and Taiwanese?  The Kurds, the Armenians, the Azeris?  The Sunni of Iraq?  The residents of Darfur and of southern Sudan? Kashmiri Muslims under Indian rule? Tamils in Sri Lanka?  German speakers in the Italian Sud Tirol?   Difficult questions affecting minorities in some Rising Powers, as well as the world’s other powers who have to formulate policies balancing the principle of national self-determination against other interests.     

Turkish municipal elections just finished today.  The vote is seen by many as a confidence vote for the ruling AK Party (Justice and Development Party) of Prime Minister Recep Tayyip Erdogan.  Most electoral analysts expect the AK, an Islamist Party which is highly criticized by secularists and military leaders, to retain its majority leadership over the Nationalist Republican Peoples’ party, despite an upturn in unemployment along with an economic slowdown.  Turkey has a secular constitution, and the rule of Islamists, however moderate they may be, has provided quite lively debate in Ankara over the nature and future of the Turkish state, traditionally protecting a strict division between religion and politics.

In some locations the election turned violent, such as in the southeast, a region dominated by a vocal Kurdish minority.  Some reports show 6 killed in election-related fighting.  The AK Party is attempting to win support in this region traditionally represented by the Kurdish Democratic Society party (DTP).

US President Barack Obama will make a key visit to Turkey next week as part of his campaign to engage the larger Islamic world.  Regardless of the outcome of the elections, Obama is likely to emphasize the importance of the success of democracy in this majority Muslim nation, unique among most other rising powers for its relative freedoms (for the ethnic Turks) and western-friendly face.

UPDATE:

After this posting was first published, election results started coming in.  The AK Party so far has 8% less points than in the election 2 years ago.  The main factor for the decline in AK Party power: the financial crisis.