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Investor prospects for the majority of European Union sovereigns took a hammering in the first months of the year, with recovery prospects deteriorating in light of the China-led financial volatility and other, more familiar fiscal concerns.
Among the 16 EU borrowers downgraded by experts taking part in Euromoney’s country risk survey were Belgium, Estonia, Finland, Latvia, the Netherlands and Poland.
Another to feature was France, with its risk score downgraded to 68.7 out of a maximum 100 points, adding to its seemingly never-ending downward trend.
Struggling to regain the confidence of investors, waning sentiment towards France pushed the country further down in Euromoney’s global rankings, to 26th out of 189 countries surveyed, and into the bottom half of ECR’s tier-two category, symbolizing an A- to AA credit rating.
France is presently rated AA/Aa2, but seems over-rated compared with Slovakia, which equivalently appears under-rated on an A+/A2 rating, and is improving in the survey.
Something will have to give.
Favourable comparison
The French economy is picking up, but slowly. GDP increased at an average quarterly pace of 0.3% in real terms during the second half of 2015, nudging year-on-year growth up to 1.4% in Q4, but it remains vulnerable to setbacks.
Investor confidence is moreover still impaired by the slow pace of structural reform and the negative imagery of the terrorism attacks in Paris leading to a state of emergency and contributing to the rise of the far-right.
Slovakia by contrast is booming and is largely sheltered from these threats. Significantly, it is not a major target for Islamists, and remains highly attractive to auto manufacturers, not least due to an improving business environment cemented by membership of the euro.
Its risk score rose to almost 70 points in Q1 2016 for the first time in three years, nudging the country higher in the global rankings to 24th, thus leapfrogging France and closing in on Estonia and the Czech Republic.
“Compared to real GDP growth of just 1.6% predicted for France in 2016-17, Slovakia’s economy is gaining speed,” says Constantin Gurdgiev, adjunct professor at Trinity College Dublin. “It is growing at around 3.6% in 2016-17.”
Gurdgiev believes much of this is accounted for by investment, which is rising as a share of GDP in Slovakia, but is relatively stagnant in France.
“There are also differential rates of growth in exports of goods and services, with Slovakia expected to outperform France on this measure in both 2016 and 2017,” he says.
David Kocourek, an economist at Komercní banka, says: “Slovakia is benefiting from both one-off factors – the investment boom supported by EU funds – and longer-lasting improvements, including falling unemployment and real wage growth underpinning private consumption.”
Slovakia’s relative merits do not stop there.
Although both countries will most likely see some modest fiscal improvements, French success is less certain because of missed fiscal targets, the slow pace of reform and the political cycle – with elections due in 12 months’ time.
“Slovakia already runs relatively lean and value-for-money-focused public spending policies,” claims Trinity’s Gurdgiev.
This entails larger deficits in France than in Slovakia relative to their economic size, and crucially France has a larger primary deficit, leaving it with less fiscal wriggle-room that is highlighting a deeper problem than the headline figures suggest.
This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.