CEE Risk/Reward Ratings: Stagnant Europe Stymies Recovery
BMI View: BMI's infrastructure risk/reward ratings (RRRs) for Central and Eastern Europe (CEE) have followed a broadly negative trajectory this quarter, as regional market conditions remain stagnant. As such, our average RRRs have been revised down slightly, reflecting a decline in European aggregate demand and a lessening of EU support for peripheral countries. Poland continues to outperform, whilst neighbour Ukraine shows little sign of upward movement from the bottom of our rankings.
Key views from BMI's Central and Eastern European Infrastructure Risk/Reward Ratings:
Key regional findings:
Despite the last three months witnessing a Spanish bailout and renewed Greek commitment to the Euro, Eurozone conditions remain muted, dampening growth prospects across the entire region. As such, our average RRRs have been revised down slightly, reflecting a decline in European aggregate demand and a lessening of EU support for peripheral countries.
Scores across the region are weighed down by high levels of corruption relative to the rest of Europe - this is especially true of the Ukraine, which we continue to highlight as a high-risk regional underperformer. A dearth of investment opportunity following the UEFA European Championships tournament will also weigh heavily on sector prospects.
Gross fixed capital formation remains low across the board and we see little room for government investment in infrastructure in the current fiscal environment. Following a period of large-scale capital investment and construction industry growth, Romania somewhat bucks this trend, yet risks in the country's business environment bring down our overall rating.
|CEE Risk/Reward Rating, Scores out of 100|
The Czech Republic has fallen below Slovenia to fourth in our rankings, representing our increasingly bearish outlook for the construction sector in the face of; significantly revised data revealing a 7.2% year-on-year (y-o-y) contraction in 2011; persistent corruption allegations leading to the freezing of EU funds; and weak cash flow into major construction projects, severe constrains on public spending and the overall caution among banks to provide long-term financing. Similar conditions apply in neighbouring Slovakia, which underperforms significantly in terms of rewards.
Poland continues to lead the region in our ratings due to its stable business environment. However, we are bearish and below-consensus on the country's medium term prospects. A maturation of the infrastructure environment will mean more limited scope for investors in the future, with lower returns on more capital intensive projects gradually becoming the norm. Continuing uncertainty within the country's largest trading partner, Germany, also weighs on our risk rating.
Kazakhstan's reward environment continues to outperform, with investment opportunities in the nascent energy sector providing some optimism. However, we are yet to witness improvements in the business environment, with corruption, poor institutions and a lack of market competition continuing to weigh heavily on our risk outlook for the country.
Russia has slipped further below Kazakhstan in our reward ratings to near parity in the overall ranking. Political risk tied to the entrenched vested interests in state-owned enterprises are the biggest threats to the business environment, and we have downgraded our assessment of the country's credit market environment. Furthermore, the government's 'short-term' tariff policy and the 'three-year-long budget' do not provide us with adequate certainty over the future of the infrastructure project pipeline.
We remain bearish on Turkey's short term reward outlook, with our forecast for reduced growth harming investment opportunity. However, we note that the economic environment is improving and it is likely that our Q113 RRRs will reflect a more positive outlook. However, an underdeveloped banking sector that is proving reluctant to finance long-term infrastructure projects continues to confer a large downside risk.
EU growth incentives will continue to aid Bosnia's development, yet spending cuts in Brussels will limit the number of projects coming online. In a notable development, the Balkans is increasingly playing host to Chinese investment in the energy sector. However, a dearth of government spending, endemic corruption, and an overreliance on capital inflows uphold our high risk rating for Bosnia.
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