S&P Outlook for 2023: Central Asia and Caucasus banking sector  outlook remains strong despite rising geopolitical tensions

ArmInfo.According to the forecasts of the American Standard and Poor's (S&P) rating agency for 2023, the prospects of the banking sector in the Central Asia and Caucasus region remain stable. This is noted in the analytical materials posted on the S&P website.

S&P expects the banking sector in Armenia, Georgia, Azerbaijan,  Kazakhstan and Uzbekistan to continue post-pandemic recovery in 2023,  supported by favorable economic growth prospects despite rising  geopolitical tensions in the region. "The influx of immigrants,  companies and remittances in 2022 has accelerated economic growth and  strengthened the funding base of banks, but this impact is likely to  be temporary and its magnitude will vary by country."

However, S&P analysts said a weaker-than-expected global economic  outlook, especially in Europe, potentially volatile commodity prices  and supply chain disruptions could dampen growth in markets dependent  on commodity export earnings and undermine the solvency of some  borrowers, which will have a knock-on effect on banks in the Central  Asia and Caucasus region.

Inflation, exchange rate volatility and the need to refinance  external funding remain significant risks for the region's banking  sector, according to S&P.

S&P says that 2022 saw the highest number of sovereign defaults  (four) in emerging market (EM) EMEA economies this century. At the  beginning of 2023, the balance of forecasts for 55 EMEA sovereign  bonds, estimated by S&P, remains negative at a ratio of 2 to 1,  practically unchanged since the end of 2021.

However, the external environment is notably improving as lower  global inflation, a weaker dollar and reopening in China support a  (selective) return of portfolio capital inflows to EMEA assets.

Despite this relief, EMEA macro fundamentals remain tight. Sovereign  debt is larger today than it was 2 years ago and is more expensive to  service. The slowdown in inflation is uneven. Finally, a series of  important elections across the EMEA region are scheduled for 2023  that will have a major impact on debt sustainability and growth.

The secondary impact of the Russian-Ukrainian war on the balance of  payments the fiscal position and inflation rates of developed  European countries, led to S&P issuing seven negative forecasts for  sovereign states of developed European countries last year.

The relatively recent decline in natural gas prices and general  inflation amid signs of resilient labor markets and demand have led  S&P to conclude that most eurozone economies will be able to avoid a  recession in 2023.The reopening of China is also likely to support  the growth of exports to the eurozone, while the euro's 13%  appreciation against the dollar will help anchor deflation and smooth  the path of the ECB key rate after a couple of 50 basis point hikes  in February and March.

As for trends in 2023, S&P notes that the hurdles have not yet been  overcome in terms of global sovereign ratings. According to the  agency's analysts, after two years of recovery and growth, the global  economy will noticeably slow down, but the resumption of work in  China may improve S&P forecasts.

The likelihood of rising global key rates, as S&P analysts suggest,  will remain high until 2024, creating additional risks for sovereign  states heavily dependent on external financing and for those with a  large amount of debt.

Geopolitical uncertainty, the ongoing war in Ukraine, and a polarized  social context create ongoing challenges for the global economy. And  while the majority of S&P's sovereign ratings have a stable outlook,  overall creditworthiness continues to deteriorate, with more than 10%  of S&P's portfolio of ratings assigned since 2023 having a negative  outlook.

It should be noted that the other day S&P agency retained Armenia's  sovereign rating at "B+" and "B" for issuing long-term and short-term  obligations in foreign and national currency, while improving the  outlook from "Stable" to "Positive".

According to the agency's observations, the review of the rating  forecast is due to the high growth rates of the Armenian economy and  the prospect of increasing the economic potential, a significant  improvement in the state budget, the public debt burden and the  external situation of the economy.  According to S&P, in the coming  months, in the event of a high level of economic growth, as well as  manageability of risks associated with fiscal policy, balance of  payments and financial stability, Armenia's sovereign rating may be  upgraded.

It would be appropriate to recall that S&P projected 8.6% GDP growth  in Armenia for 2022, expecting an average growth of 4.3% per year in  the next few years. However, according to official statistics, in  Armenia, GDP growth accelerated to 12.6% in 2022 (from 5.7% in 2021).  Regarding the projected prospects for a slowdown in GDP growth, the  rates indicated by S&P (4.3%) do not differ much from the  expectations of the Central Bank of the Republic of Armenia, the IMF  and the WB for 2023 - 4.6%, 4.5% and 4.1%, respectively.