Moody’s: Budget pressures to increase in CIS countries
In Central and Eastern Europe (CEE), a long-term strengthening in credit fundamentals and a cyclical economic rebound will lead to a moderate decline in government debt next year. By contrast, the crisis has largely exhausted previous fiscal gains in the Commonwealth of Independent State (CIS) sovereigns, and social tensions will intensify budget pressures for some next year, Report says, citing international credit rating agency Moody’s.
Broader external balances and fragile confidence in local currencies leave CIS sovereigns susceptible to retrenchment of financial market sentiment. More substantial fiscal and external buffers insulate Russia (Baa3 stable) from the crisis. For CEE countries, recent progress toward euro area accession in Bulgaria (Baa1 stable) and Croatia (Ba2 positive) has reduced external vulnerabilities.
In the CIS, the threat of new sanctions on Russia, heightened political instability in Belarus (B3 stable) and military tensions between Armenia (Ba3 stable) and Azerbaijan (Ba2 stable) risk triggering further economic and fiscal pressure. Political risks remain more contained in the CEE, although elections in Bulgaria and possibly Romania (Baa3 negative) point to some policy uncertainty. Across the CIS, loan impairments will increase thanks to the double economic shock of the COVID-19 outbreak and oil price slump. The impact will vary, with Russian banks’ loan books most resilient. Banks’ strong capital buffers will mitigate asset quality deterioration.
Russia’s central bank will continue monetary easing to counter the the downturn, keeping interest rates low for a prolonged period. This will pressure banks’ interest margins by suppressing lending rates, but will be partially offset by declining funding costs, asset, and securities valuation gains and greater corporate credit demand thanks to improved loan affordability.
Lockdowns and social distancing will spur digital banking and noncash payments service development in CIS. More bank transactions will support fee and commission income, and the move to mobile channels will boost banks’ operating efficiency. The competitive landscape will also change, with those banks best able to develop and implement innovation more likely to thrive.
A commodity market downturn or new US/EU sanctions would harm the fragile recovery, given the economy’s dependence on these exports. The economy remains supported by its relatively low service sector exposure, high industry concentration, and gradual monetary policy easing.
Despite low oil prices and production cuts, Russian integrated oil and gas majors will benefit from the upstream taxation regime, weak ruble and strong liquidity. Improving commodity prices and cost competitiveness will help steel-makers and miners’ profit and cash flow generation.
Market conditions for travel-related companies like DME Limited (Ba1 negative) will remain strained. Companies with high investment needs like Nizhnekamskneftekhim PJSC (B1 stable) and weak liquidity like Zangezur Copper Molybdenum Combine CJSC (B3 outlook developing) will remain under pressure.