BMI View: Previously highlighted downside risks have played out, with our Risk/Reward (R/R) Ratings for Central and Eastern Europe (CEE) broadly following a negative trajectory as regional market conditions remain stagnant. The average regional score has declined slightly, reflecting a weakening in sector-specific and macroeconomic conditions, with EU support for peripheral countries decreasing. Turkey, Russia and Poland continue to outperform, whilst Hungary shows little sign of upward movement from the bottom of our rankings.
A n overhaul of our methodology behind the p ower RRRs , coupled with the addition of Bulgaria to the regional portfolio, has resulted in some changes. BMI has introduced new RRRs for the Power service, and we want to strengthen this analytical tool by integrating aspects of our new Renewables RRRs and Infrastructure Project Finance ratings. The methodology behind the Power RRRs has also been enhanced by revising the individual weighting of various industry-specific factors, to provide a more accurate picture of the power markets.
As such, we have observed a broad increase in the industry risk scores for the countries in the CEE region. Sophisticated and well-established renewables policies (especially in the EU member states) have played a key role in boosting scores. Similarly, the incorporation of a project finance indicator in our ratings has provided a better quantification of the relatively lower risks faced by power projects in the majority of those countries when raising financing and repaying loans over the course of a project's life.
|Mixed Picture, But Down Overall|
|CEE Power Risk/Reward Ratings, Scores Out Of 100|
However, even considering the improved metrics and the more accurate depiction of these markers that they provide, the ongoing eurozone debt crisis, growing signs of a slowdown in global economic activity and rising risk aversion amongst investors are weighing significantly on the region's performance. This is clearly reflected by the decline in the average regional score, down from 45.9 in Q312 to 45.1 in Q412.
|Headwinds Make Picture Less Balanced|
|CEE Power Industry Risk/Reward Ratings, Scores Out Of 100|
This considered, and in light of the macroeconomic and-sector specific dynamics at play, we believe that the main themes for BMI's CEE power RRRs are:
Our outlook for the region remains relatively bearish, as evidenced by a widespread decline in Industry and Country Rewards. Despite there having been a Spanish bailout and renewed Greek commitment to the euro, eurozone conditions remain muted, thereby dampening growth prospects across the entire region.
As illustrated by our country risks and infrastructure analysts, gross fixed capital formation remains low across the board. As such, we see decreasing room for government investment in power infrastructure in the current fiscal environment. For instance, after years of uncertainty and numerous delays, in March 2012, Bulgaria formally abandoned construction of the 2000MW Belene nuclear power plant, citing funding difficulties.
We maintain our view that EU members will be among the worst affected, with weakened economic growth prospects impacting already modest growth rates.
That said, our view that the power sector of domestic-demand-led economies will outperform the region has played out well. Despite a decline in its reward rating, Poland has retained its third place in our regional table, as well as its leadership within the EU members' subset of our CEE portfolio.
Turkey is still top by some distance. We note that its score for Country Rewards has dropped from 54.00 in Q312 to 49.40 in Q412, supporting our more bearish short-term outlook. That said, potential in the power hungry country remains elevated, with Turkey being the sole member of our CEE portfolio to have maintained the same industry rewards score as the previous quarter.
Macroeconomic Woes Take Away Some Of The Shine
In previous analyses, we remarked that our power rates identified (and quantified) a clear distinction between the power sectors of EU and non-EU members in the region in terms of rewards and risks. Russia and Ukraine, and to a lesser extent Kazakhstan, offer relatively more attractive industry rewards on account of their significant market size and/or more bullish growth prospects; however, their overall score is significantly penalised not only by inherent country-specific risks, but also by the limited level of liberalisation, lack of subsidies and difficulties in accessing finance, and this is reflected in the country's low industry risks score.
Conversely, the EU member states generally present higher scores for both industry and country risks, thanks to their common commitments to market liberalisation and the substantial subsidies introduced to reach their renewables and carbon-related targets. Yet, lower reward rates highlight the relatively modest growth expectations in these power markets, which are limited by a small market size and positive, but restrained, growth in electricity consumption (calculated considering BMI's five-year forecasts).
Adverse macroeconomic conditions and potential difficulties in project finance have further exacerbated these differences. While risks remain higher in non-EU members, their RRR profiles appear more balanced. Conversely, high scores for strong regulatory frameworks and more friendly business environments dwarf falling industry rewards in EU members, confirming our view that comparatively strong regulation might do little to incentivise investments in these power markets over the short term.
|Industry Rewards||Country Rewards||Rewards||Industry Risks*||Country Risks*||Risks*||Power R/R Ratings||Rank|
|*Higher score = Lower risks. Source: BMI.|