OREANDA-NEWS. September 14, 2015. Fitch Ratings says in a new report that the combination of stronger current account balances and banks' external debt reduction is supporting an improvement in the external metrics of Hungary (BB+/Positive), Poland (A-/Stable), Slovenia (BBB+/Stable) and Slovakia (A+/Stable). Fitch expects these trends to continue, including stronger external finances, which could support positive rating actions over the medium term. In Hungary, rapid decline in net external debt (NXD) was the main driver behind the recent change of the Outlook to Positive.

Hungary, Slovenia and Slovakia have seen their current account move into surplus from deficit while Poland has witnessed its current account deficit shrink considerably. This can be attributed to stronger exports following industrial expansion, weaker domestic demand relative to the pre-2008 era, lower oil and commodity prices, and reduced external interest repayments. Improvement in the current account, augmented by net foreign direct investment, and capital transfers have allowed these countries to generate external surpluses and helped net repayments of external debt.

EU transfers to support economic development have been a key source of non-debt foreign capital inflows and supported improvement in the countries' external balance sheets. Transfers from the EU will continue with the start of the new 2014-2020 EU investment cycle. Equity foreign investment has also contributed to these dynamics, especially in Poland and Slovakia, albeit less than pre-2008 levels.

The improvement in NDX in Hungary and Slovenia has primarily been driven by banks' external deleveraging from a high level after the 2009 banking crisis. While western European parent banks sharply cut their exposure to these two countries, the contraction in the banks' loan portfolio after the credit boom of the 2000s and rising non-performing loans have supported a reduction in funding needs. Banks' external debt has also declined in Poland and Slovakia, but to a lesser extent, and from a much lower level.

In Hungary and Poland, the repayment of foreign currency (FC) loans extended to the private sector before 2008 has been an important driver of banks' external deleveraging. In Hungary, the conversion of remaining FC mortgages (equivalent to 12% of GDP) into local currency in March 2015 accelerated the process. In Poland, FC loans still accounted for 47% of housing loans (equivalent to 8% of GDP) as of end-June 2015. Conversion of FC mortgages has been at the centre of the debate ahead of Poland's October 2015 general election.

In Slovenia and Slovakia, and to a lesser extent, in Poland and Hungary, external government debt has markedly increased since 2008, in part offsetting the trend in bank external debt reduction. Rapidly rising government debt has led to higher financing needs, and sovereigns, with only limited domestic markets, have turned to international markets, especially as global interest rates remain low. In Fitch's view, greater recourse to foreign investors may improve financing conditions (i.e. lower yields and longer maturities), but could exacerbate exposure to global financial volatility.

Non-bank private sector external debt has been generally stable in recent years after a steep rise in the 2000s. This partly reflects lower foreign investment inflows related to weaker activity in the eurozone and the maturity of the industrial outsourcing process, which could affect economic growth prospects. A large share of non-bank private sector debt comprises intercompany loans, especially in Hungary (76% of the total) and Poland (59%), which largely mitigates refinancing risks.

The report, Stronger External Metrics in Hungary, Poland, Slovenia and Slovakia, is available on www.fitchratings.com.