"Growth in EE is expected to drop more than in other regions as the characteristics of many countries - such as trade openness, prior macroeconomic imbalances and commodity dependence - leaves them relatively exposed to the major shocks that have rocked the global economy: the sharpest and most synchronised recession in the world's "advanced" economies since World War II; a reversal of international capital and financial flows; and a dramatic decline in commodity prices," said Mr Parker.
Fitch notes that the divergence in growth prospects this year - from +2.5% in Azerbaijan, to (minus) - 12% in Latvia - underlines the need to differentiate between countries rather than treat EE as a homogenous block, as reflected in different sovereign rating levels and rating actions since the onset of the global financial crisis. The agency has downgraded the sovereign ratings of 10 countries in EE, by a total of 14 notches, since August 2008. Ten countries are now on Negative Outlooks and none on Positive Outlooks.
According to Fitch, the economies most exposed to the dramatic decline in global trade and financial flows and 'deleveraging' process are Hungary ('BBB'/Negative Outlook) and Kazakhstan ('BBB-' (BBB minus) on Rating Watch Negative), while Poland ('A'/Stable Outlook) and Turkey ('BB-' (BB minus)/Stable Outlook) are least exposed, albeit not immune, to these shocks.
The slump in GDP will be the first since the Russian crisis in 1998, when output fell by 0.5% and the steepest since the drop of 6% in 1994 (based on 2007 GDP weights). Out of 21 countries it covers in the region, Fitch forecasts GDP to contract in 19 of them, be flat in one and grow in only one - a much more widespread recession than in 1998/99 when half the countries continued to grow. Of the largest economies, Fitch forecasts both Russia and Turkey to shrink by 3% and growth to be 0% in Poland.
The central European economies (with the exception of Poland) will be badly affected through the trade channel as they are relatively open and their exports are weighted towards cyclical industries such as cars. Commodity producers, mainly in the CIS, will see a sharp drop in income from the fall in their terms of trade. Some poorer countries in the CIS and Balkans will see a drop in workers' remittances.
Most countries will be adversely affected by deleveraging and see a sharp slowdown or reversal of private capital inflows and credit growth Those with large current account deficits, high bank loan/deposit ratios and/or dependence on foreign financing - particularly the Baltic and Balkan states, as well as Hungary, Kazakhstan and Ukraine - will suffer falls in domestic demand as they have to rapidly correct macroeconomic imbalances. In some countries, difficulties will be compounded by a drop in asset prices and the presence of foreign-currency debt on balance sheets.
Usual cyclical forces - such as the fall in household income expectations and wealth, retrenchment in business investment, the inventory cycle and higher unemployment - will amplify the downturn. Most countries have limited capacity for counter-cyclical fiscal policy, but will benefit from lower global interest rates and fiscal expansion within the EU15. IMF and other international assistance will play a crucial role in providing financing and bolstering confidence in several countries.
