May 15, 2017 / 8:34 AM / 8 months ago

Fitch: EU Membership a Strong Support for Sovereign Ratings in the Visegrad Countries

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Visegrad Countries and European Union Membership here PARIS/LONDON, May 15 (Fitch) Fitch Ratings says in a new report that European Union (EU) membership has been a strong support for the sovereign ratings of the four Visegrad countries (V4). A deterioration in the relationship between the V4 and the EU could lead to negative pressures on the ratings in the medium to long term, depending primarily on its impact on economic prospects, institutional quality and the economic policy framework. Sovereign ratings of candidate countries to the EU would likely benefit from accession, but that looks distant. Accession to, and membership of, the EU has supported the sovereign ratings of the V4 (Poland (A-/Stable), Hungary (BBB-/Stable), the Czech Republic (A+/Stable) and Slovakia (A+/Stable)). Benefits have been clearest through economic development and the quality of institutions. Monitoring of economic and fiscal policy by the EU in the context of the European Semester has bolstered macroeconomic stability and structural reforms. Hungary, since 2010, and Poland, since 2015, have adopted more confrontational attitudes to the EU. While relations with the Czech Republic and Slovakia have been smoother, during the migrant crisis all V4 countries coalesced in a common rejection of EU policy. Some EU members have voiced concerns in response to these developments, but there have been few concrete policy steps or sanctions. However, there are risks that this relatively favourable stance could change, in Fitch's view. Fitch believes the bulk of institutional and economic policy gains from EU membership are entrenched. However, further deterioration in relations with any of the V4 countries could alter economic and financial ties with the EU. This would be compounded by a potential move to a "multi-speed" EU, as suggested by the main EU leaders in early 2017, which could sideline some V4 countries. Such a scenario could have negative rating implications depending primarily on its impact on economic prospects, institutional quality and the economic policy framework. The sources of economic benefits for the V4 have been access to large EU structural funds, integration within the single market and associated gains in trade, investment and productivity. Given its low level of development relative to other EU countries, the V4 has attracted a large share of EU structural funds (EUR152 billion for the 2014-2020 EU investment cycle, or about a third of total funding). The departure from the EU of the UK, one of the biggest net contributors to the EU budget, is likely to impact on funds available in the future. EU accession has supported the quality of institutions as it entails the adoption of a legislative package and the reform of key institutions to match EU requirements. Most significantly for ratings, this has supported the quality of governance, primarily via enhancement of institutional checks and balances and respect for the rule of law. Progress seems to have been stronger before than after accession, likely reflecting the lack of power of EU institutions to impose reforms on member countries. EU rules on government deficits and debt have become an important anchor for fiscal policy in the V4. The 3% deficit criterion may be especially useful in limiting fiscal slippage ahead of general elections (for example, in Hungary in 2014 and Poland in 2015). EU membership has also gone hand in hand with policies focusing on low and stable inflation, which has helped anchor inflation expectations. For the five EU candidate countries (Albania, Montenegro, Macedonia (BB/Negative), Serbia (BB-/Stable) and Turkey (BB+/Stable)), joining the EU would likely boost sovereign ratings, notably via reform momentum, access to EU funds and likely support for political stability. However, after the addition of 13 new member states in the past 10 years and the planned departure of the UK, further enlargement is not on the EU's agenda. The report, 'Visegrad Countries and European Union Membership', is available on or by clicking on the link above. Contact: Arnaud Louis Director +33 (0)1 44 29 91 42 Fitch Ratings S.A.S 60 rue de Monceau Paris Paul Gamble Senior Director +44 20 3530 11623 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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