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SPECIAL ADVERTISING SECTION
European Bank of Reconstruction & Development Annual Meeting 
Standard & Poor's currently rates 14 post-Communist countries, which are members of the European Bank for Reconstruction and Development (EBRD). Nine of the 14 countries had investment-grade foreign currency sovereign credit ratings at the end of the first quarter of 2002, ranging from 'A' for the Republic of Slovenia to 'BBB-' for the Slovak Republic and the Republic of Croatia. The remaining five countries fall into the non investment-grade category, with foreign currency sovereign credit ratings ranging from 'BB' for the Republic of Kazakhstan to 'B' for Ukraine (see table). 
All of the investment-grade countries (except Croatia) have entered the final stage of negotiations for their accession to the European Union (EU), which Standard & Poor's expects as early as in 2004. The positive economic and political developments initiated by these countries over the past several years to adopt rigorous EU requirements have been one of the main supporting factors in their improving creditworthiness. Going forward, the speedy implementation and enforcement by each country of the new body of law in order to facilitate their full EU integration would underpin future improvement in their creditworthiness. Conversely, failure to efficiently implement these requirements in a timely manner could jeopardize future improvements in the ratings of these countries. Standard & Poor's does not expect the creditworthiness of these countries to deteriorate over the next few years. All eight front-runners demonstrate a broad commitment across the political spectrum to finalize EU negotiations quickly, which provides a strong anchor for pursuing remaining reform. Croatia is the only investment-grade-rated European country that has not yet started negotiations on its eventual EU accession. The exclusion reflects the country's difficult political path following its independence. However, Croatia signed a Stabilization and Association Agreement with EU in 2001. Standard & Poor's expects that, as was the case in other accession countries, Croatia's speed and effectiveness in adopting various laws and pursuing reforms to facilitate its future integration within EU will be one of the main supporting factors in its future creditworthiness. The Republics of Bulgaria and Romania, two noninvestment-rated countries were also invited to start EU accession negotiations some time ago (December 1999, together with the Republics of Latvia, Lithuania and the Slovak Republic). However, both had to implement substantial macroeconomic and structural reform, which the others had started in the early 1990s, in order to be adequately prepared for EU accession and to conform to EU laws. While their inauguration within the EU's ranks will, therefore, take a few more years, their creditworthiness has improved over 2001-2002--mirroring both a significantly improved policy environment and ensuing economic performance. Romania's rating was raised twice over the past year, while Bulgaria's higher rating was raised once. Standard & Poor's expects that both countries will continue to maintain their current conservative fiscal and monetary stands and further intensify structural reform. Their current ratings and chances for a longer-term trend of improved creditworthiness could be jeopardized if fiscal discipline is prematurely relaxed and political support for economic restructuring weakens. This would also adversely affect investor confidence, international support, and growth prospects. Kazakhstan, the Russian Federation and Ukraine are the only three former Soviet Union countries rated by Standard & Poor's. The creditworthiness of both Kazakhstan and Russia has improved over the past year. In both countries, as in Bulgaria and Romania, significant progress in reform over the past couple of years has been the main factor behind creditworthiness. This trend is expected to continue in the future, as indicated by Russia's positive outlook and the stable outlook on Kazakhstan's relatively high 'BB' foreign currency rating. Still, all of them face many structural challenges, such as further fiscal reform, deeper restructuring and modernization, further economic liberalization to support the development of the small- and medium-sized sector, and high infrastructure and social spending needs. In addition, the populations of all four countries face increasing income inequality, unemployment, and proportional poverty, polarizing societies that were used to more equality. While Ukraine is still, by most measures, the laggard among all the non investment-rated former Communist countries, particularly in terms of the political environment, it has been catching up over the past two years. Corporate Governance: Some Developments in the EU Accession Countries As many countries in Central and Eastern Europe move along the road towards EU Accession, one area that has come into focus is that of corporate governance. There is significant preparatory activity on the part of regulators and exchanges in the accession countries, the development of local corporate governance codes being one manifestation of this activity. Standard & Poor's work on corporate governance with companies has shown that there are four key areas to examine when doing company level analysis. The first, ownership structure and influence is particularly interesting in transition countries, as the public sector ownership is unwound. The second, stakeholder rights are crucial, especially to international investors who do not necessarily have local knowledge of the company. Transparency & disclosure, which takes in such subjects as the accounting framework used and the auditors, is the third area of focus, and is no less important in transition economies than elsewhere in the world. The final area is that of board structure and process, and it is in the analysis of this crucial piece that the interactive approach to governance assessment sees the most return. It is important to understand how the day-to-day business of governance works in a company as well as to understand whether it is adhering to global best practice vis à vis the structure. In the transition economies one of the issues companies are potentially faced with is the small pool of qualified non-executive directors from which to appoint their board. In this regard Standard & Poor's involvement in corporate governance training is an important new departure. Although Standard & Poor's believes that companies themselves are the primary drivers of their own corporate governance standards -- it is only they that can put into practice on a day-to-day basis the substance of good corporate governance -- we also believe that a strong regulatory and legal framework is important for good corporate governance to flourish. The World Bank Institute recently released their study on the 'macro' or country level indicators of governance. The World Bank Institute conducted an analysis of 175 countries worldwide looking at six key aspects of governance at the country level. The study, which is available at http://www.worldbank.org/wbi/governance/wp-governance.htm, focused on data over the period 2000/1 and was an extension of a study carried out earlier using data from 1997/8. The fact that there are now two studies is useful in enabling comparisons between the two studies as well as the normal cross-country comparisons. The study focuses on six measures, which are related to corporate governance and anti-corruption. They are
Although all the measures included in the report are important, we focus on two in particular in this article, namely: Rule of Law and Regulatory Quality. We also look at only certain of the accession countries namely:
Slovenia, Estonia and Hungary are assessed as having rankings in the 7th decile -- higher than Italy. Turkey, Romania and Bulgaria although ranked significantly higher than Ukraine and Russia are the lowest three of the accession countries in both measures. In the case of Turkey the country's Regulatory Quality is only ranked in the 3rd decile. The rankings themselves are interesting to understand how close the transition countries are to western Europe. It is also useful to understand how these countries have changed between the two studies. The period between 1997 and 2001 was one in which significant developments have occurred. Chart 2 shows the change in the assessments. 
Looking at the Rule of Law measure (Light color bars), one finds an almost unilaterally positive picture; with the notable exception of Turkey all the countries improved. Estonia showed the largest positive change, enabling it to join Hungary and Slovenia closer to the OECD average ranking. Hungary & Slovenia embraced change early and this is reflected in their high overall ranking. Both countries continue to make positive changes on this measure. The changes in Regulatory Quality do not demonstrate the same clear pattern. Again Estonia and the Slovak Republic were assessed as making the most improvements, while Turkey is joined by Bulgaria and Romania in demonstrating negative developments on this measure. Our view is that macro level reform and improvement are crucial. Authorities in central and east European countries are taking the subject of corporate governance seriously and the active involvement of various parties including regulators, institutions, and academics are to be applauded. However, independently, the companies themselves have significant gains to be won from early adoption of good corporate practice and the demonstration of their practices to international investors, creditors (including suppliers), and indeed customers. Compliance with (improving) local standards is required to demonstrate that companies are putting in place the structures required to move towards better corporate governance. However, this cannot assure stakeholders that a particular company has adopted global best practice in terms of structure and practice. Looking at the example of Russia is useful. On the Rule of Law measure, Russia ranks only in the second decile, while on the Regulatory Quality measure it ranks in the lowest (first) decile. Viewing corporate governance from this 'macro' level Russia still seems to present significant corporate governance issues, and indeed these should not be underestimated. However, one should note two points here. Firstly, there have been positive changes in Russia since the 2000/1 World Bank Institute study was completed -- not the least being the development of the new corporate governance code. Secondly, Standard & Poor's work with Russian companies on their corporate governance practices has shown that there are some companies that score fourth and fifth deciles -- not the first and second deciles (which the macro measures described here would suggest)*. Standard & Poor's Corporate Governance Score (CGS) does provide a way for companies to communicate their corporate governance standards to their stakeholders. The scores are provided on an internationally comparable scale of CGS-1 (low) to CGS-10 (high). Details of the Standard & Poor's CGS are available on: http://www.standardandpoors.com/Forum/RatingsAnalysis/CorporateGovernance/index.html * It is important to note that the World Bank Institute measures are indicative of the support for good corporate governance within a country, but they are not directly comparable with the measures used by S&P in its company analysis. However, in the absence of company specific indicators, country indicators are sometimes used as a proxy for corporate governance at the company level, therefore it is not inappropriate to compare the two. Additional information is available at: http://www.standardandpoors.com |
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© 2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.