TODAY.AZ / Business

Fitch names Azerbaijan as "the most vulnerable to potential economic shocks"

07 September 2006 [08:58] - TODAY.AZ
Rapid credit growth and strengthening exchange rates have increased the systemic risk in Romania and Ukraine, according to a new report yesterday from Fitch Ratings.

This could tip Romania, which is poised to join the European Union on January 1, and Ukraine, another long-term EU hopeful, into one of the highest risk categories monitored by the credit ratings agency in the next six months.

Investors are increasingly focused on potential triggers to systemic crises, particularly given recent market volatility.

The conclusions of the report, which examines 81 economies, are based on two indicators. The banking system indicator measures intrinsic banking system quality or strength while the macro-prudential indicator looks at excessive lending growth when accompanied by either strong asset price appreciation or real exchange rate strength.

Azerbaijan is the most vulnerable to potential economic shocks, followed by Russia, Iceland, South Africa and Ireland, according to the report.

Earlier this year, Iceland and South Africa, in spite of relatively strong banking systems, suffered heavily when risk aversion led to a widespread sell-off across world financial markets.

Their potential risk stems largely from dramatic credit growth and currency appreciation and sharp asset price growth. Both countries have been raising interest rates in recent months to cool down their economies.

Richard Fox, senior director in Fitch's sovereign team and co-author of the report, said that in Romania and Ukraine, real credit growth exceeded 30-40 per cent last year.

That, along with strong real exchange rates and, additionally in Ukraine, strong equity prices, meant the risk outlook for both countries could deteriorate.

However, he pointed out that the data, particularly for the macro-prudential indicator, were "volatile and notoriously difficult to forecast."

He added that systemic risk indicators did not necessarily portend future ratings actions.

Overall macro-prudential risk has increased only slightly in the past six months, while strengthening in a number of banking systems has helped reduce overall bank systemic risk.

However, 40 countries, or just under half of the countries monitored, find themselves in high categories for systemic risk. The majority of these are concentrated in central and eastern Europe.



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