CEE Risk/Reward Ratings
BMI View: BMI's infrastructure risk/reward ratings (RRRs) for Central and Eastern Europe (CEE) have continued along the 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 and lead the regional ratings table.
Key views from BMI's Central and Eastern European Infrastructure Risk/Reward Ratings:
Key regional findings:
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.
The construction sector in the European Union as a whole declined by 5.8% y-o-y in June 2012. The worst performers were Romania and the UK on a month-on-month basis.
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.
|Rewards Keep Falling Across The Region|
|CEE Infrastructure Risk Reward Ratings, Scores out of 100|
Most changes in our ratings this quarter have been down grades of scores with Slovenia, Romania, Kazakhstan, Hungary and Bulgaria all losing some ground on the back of weak construction data. Our regional average has therefore fallen slightly, though it should be noted that CEE as a whole performs better than the global average of 50.9.
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.
Political risk tied to the entrenched vested interests in state-owned enterprises are the biggest threats to the business environment in Russia. We have been downgrading our infrastructure sector growth expectations and as such Russia's score has been steadily falling over recent quarters, though this quarter it has remained steady as we have maintained our growth outlook.
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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