The economy in the euro zone was severely affected by the global decline in demand. The drop in international demand caused production cuts in the euro zone. Industrial output dropped in January by -16% and in February even by -18.4% (y/y). Sentiment indicators and the economic data do not contain any signs of an end or slowdown to the downtrend, and therefore, we expect GDP to shrink in the euro zone by -3.6% in 2009. A longer-lasting downturn of the economy would probably have more influence on industrial gas and electricity consumption. We still expect a moderate recovery in 2010.
Central and Eastern Europe – just like the entire world – is in the midst of an economic contraction. However, the extent and causes of the economic down swing vary widely within the region. Countries with a high exporting share are suffering more, because global demand for goods has declined steeply. Any recovery would be closely related to developments in Euroland. It is only in the second half of the year we expect stabilization, however in 2010, the subsequent recovery of Central and Eastern Europe might be faster than in Euroland, as it would receive additional support from the massive upside potential in productivity versus West European countries. This gap is the starting point for the higher economic growth rates in Central and Eastern Europe over the long term. However, we will not see a return to a boom phase in the entire region like from 2005 to 2007 any time soon.
The current plunge of the global economy is shifting the attention of investors increasingly towards defensive stocks. Due to the low degree of cyclicity (inelastic demand), a feature of the utility sector is a stable operating business. The solid operating development, stable cash flows and high sector credit ratings have helped utilities gain the status of “safe havens”. The balanced business risk profiles of most companies highlight this feature. The liquidity profile of the sector is stable, and moreover, most companies have sufficient credit facilities at their disposal. In CEE and in Southern Europe (France and Spain), the state also holds large shares in the utility groups, usually acts as guarantor for long-term debt and contributes positively to the credit quality of the companies. Although the companies have to adjust to fluctuations in demand from industry, private consumption is generally not elastic.
The sector currently has an average long-term rating of “A2”, which is in the upper medium range of the rating scale and is rated relatively higher than most other sectors. Due to the difficult conditions on the capital markets, utilities are interested in obtaining the best ratings possible1 to make access to credit markets easier. The new bond issues2 were used in most cases to optimize the term structure of debt which had been relatively short at some companies.
The integration of the gas and electricity business, and the geographic diversification are the most important motivations for consolidation. In this kind of enviroment, attractively priced industry players become enticing takeover candidates.
“We expect the management of the groups to be more selective in their investment decisions than in the past years. Otherwise, an excessively aggressive expansion (with high leverage3) would put the ratings of the companies at risk,” says Alihan Karadagoglu, credit analyst at Erste Group.
D.C.