OREANDA-NEWS. Fitch Ratings has issued a new report providing a country-by-country overview of sovereign credit trends in Emerging Europe. Key themes identified in the report include rising political populism, the easing of the recession in Russia, adjustment in the region's oil exporters and mixed developments in Turkey.

Political populism appears to be rising in central Europe, in part triggered by the large flow of migrants through the region. Politicisation of institutions is becoming more prominent and significant fiscal loosening is occurring in some sovereigns. The loosening comes at a time of solid fiscal dynamics, meaning that a forecast deterioration in the structural fiscal position is not expected to be directly reflected in headline data.

The recession in Russia is easing and Fitch expects a return to growth by the end of the year. Higher oil prices are supporting the fiscal position, but there remains uncertainty over possible spending ahead of the legislative elections in September and over the medium-term fiscal plan, which will be unveiled after the polls. The stabilisation of the Russian economy, and a modest appreciation of the ruble, should support performance in regional trading partners. However, likely tepid Russian growth is not expected to lift investment or the employment of expatriates whose remittances are a key source of revenue to some near neighbours.

Kazakhstan and Azerbaijan are adapting to lower oil prices and abrupt exchange rate adjustments last year. In both countries, the authorities are focussing on building the necessary conditions and toolkits to manage a floating currency. The first stage is restoring confidence in the local currency, which is reviving faster in Kazakhstan. Both economies are forecast to shrink and record double-digit inflation, adding to pressure on already troubled banking sectors that were also hit by open FX positions and unhedged FX borrowing.

Pressure on the fiscal position has been absent in Turkey, where data for the first five months of 2016 show a central government surplus despite the implementation of election-related spending commitments. However, the president has maintained his views on the need for lower interest rates and monetary policy has been loosened despite structurally high core inflation. The appointment of a new prime minister supportive of constitutional reform that will expand the powers of the presidency could revive political uncertainty and the process could potentially undermine institutional checks and balances.

The Brexit vote creates significant uncertainty for the region. Direct trade and investment links are modest and Emerging Europe has little exposure to UK banks. However, an EU slowdown would hit growth. Political repercussions are negative, but unclear.

Since the start of 2016, Fitch has upgraded two sovereigns in Emerging Europe and downgraded two. Hungary and Serbia were upgraded, due to narrowing external imbalances and tighter fiscal policy. The two downgrades were Azerbaijan and Kazakhstan, reflecting the impact of lower oil prices on their sovereign credit profiles. The outlook was not changed on the ratings of any other sovereign in the region.