S&P: Turkey most vulnerable to Eurozone shocks

Standard & Poor's announced the results of its new index, measuring the relative vulnerability of 19 Central and Eastern European countries, including nine Balkan nations, to disruptions in capital inflows.

(Hurriyet, Dow Jones Newswires - 03/03/12; ACTMedia News Agency, Romania-Insider 01/03/12; Standard and Poor's, AFO - 29/02/12)

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Turkey is the most vulnerable to potential Eurozone shocks, the financial services company Standard and Poor's (S&P) said on Wednesday (February 29th) announcing the results of a new index that assesses the impact of disruptions in capital inflows on emerging European economies.

  • Shoppers at a bazaar in the border city of Kilis, southeastern Turkey. Turkey is the most vulnerable to potential Eurozone shocks, according to Standard and Poor's new index. [Reuters]

    Shoppers at a bazaar in the border city of Kilis, southeastern Turkey. Turkey is the most vulnerable to potential Eurozone shocks, according to Standard and Poor's new index. [Reuters]

The ratings agency's first Emerging Europe Sensitivity Index (EESI) covers 19 countries outside the euro area, including nine Balkan nations, eight former Soviet republics, as well as Hungary and Poland.

"We assess Turkey as being the most vulnerable to sudden financial account outflows and external refinancing risks. Its EESI score is the highest of all, at 2.94," S&P said. "The most obvious side effect of Turkey's credit boom has been the rapid widening of its current account deficit to a multi-year high of 10% of GDP in 2011 [a deterioration also instigated by higher oil prices]."

The statement announcing the findings of the new index did not offer an explanation of the methodology used in compiling the EESI report, nor did it specify which, if any, of the indicators carried the biggest weight in a country's final score.

The new index does not directly affect S&P's sovereign credit ratings of the surveyed countries, the agency said. But external shocks could lead to an increase in public debt levels and imply downward ratings pressure.

"The risk is that, despite the rebalancing achieved so far, the renewed deleveraging of the Eurozone financial sector could trigger destabilising capital outflows from many emerging European economies, with negative knock-on effects on growth and public finance."

The analysis of the countries showed that most had made progress in reducing their previously high current account deficits, S&P noted, citing Turkey and Ukraine as "notable exceptions".

Senior Turkish officials slammed S&P's conclusion that their country -- one of the top three fastest-growing economies in the world in 2011, according to a recent IMF report -- was the most exposed to possible disturbances in capital inflows.

Deputy Prime Minister Ali Babacan viewed the assessment as biased, while Finance Minister Mehmet Simsek described it as "weak and incomplete."

"There is a current account deficit problem that stems in part from energy prices and from strong domestic demand, but to only focus on this when deciding that Turkey is the most vulnerable country shows that the analysis is not very substantive," a report by Turkish daily Hurriyet Simsek as saying at the Izmir Chamber of Commerce on Saturday.

S&P's report places each of the surveyed economies in one of five categories, depending on their level of susceptibility to disruptions in capital inflows, according to Romania's ACTMedia News Agency. Hungary, which was given the second-highest score of 2.09, fell in the same group with Turkey.

"It owes its vulnerability to its external debt stock, rather than its external flow position; Hungary actually ran a small basic balance surplus in 2011," S&P said.

Bosnia and Herzegovina was placed in the second group along with Latvia, while Poland, Georgia, Montenegro, Lithuania, Serbia and Belarus fell into the third category, comprised of countries with an average vulnerability to potential external shocks, the Romanian news agency reported.

The fourth group included Ukraine, Romania, Albania, Croatia and Bulgaria, viewed as facing moderate-reduced vulnerability, according to ACTMedia.

The only Balkan economy among the four considered as least sensitive to Eurozone shocks was Macedonia. The other three were Russia, Kazakhstan and Azerbaijan, with scores of -0.07, -0.45 and -2.19, respectively.

Eight of the 19 countries -- Albania, Serbia, Romania and Macedonia among them -- have become "more open than ever before," as measured by exports to GDP, according to S&P.

"But any protracted weakening in Eurozone demand for their exports, or waning Eurozone parent bank support, could weaken confidence in emerging Europe, just as it appears to have adjusted to a less credit-driven growth model," the agency warned.


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