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14.01.2004

EU-Accession Countries Facing Big Challenges

  • Reality check ahead.
  • Equity markets to benefit from global economic recovery and low interest rates.
  • Credit spreads are low, but EMU accession will come later than expected.

Along with the significant advantages that EU membership provides, the accession countries will be confronted with new challenges. “The period right before and after the EU entrance will be a reality check for the new members”, Willi Hemetsberger, Member of the Managing Board of Bank Austria Creditanstalt stated on the occasion of the Euromoney Conference in Vienna. “This will be the point when it becomes clear how well the countries have prepared themselves for the Union.”

In the long run, EU accession will have a positive impact by lowering country risk, improving business confidence for long-term investment, and encouraging inward foreign investment. Above-average growth rates in the accession countries mean that wealth creation and corporate profits will grow more rapidly than in other European countries.

EU accession is unlikely to cause that much excitement for markets. The event has been a known fact for a long time and the financial markets have already priced in most of the benefits.

Equity environment is positive
Global economic recovery, combined with low interest rate levels on both sides of the Atlantic, provide a positive environment for Emerging Markets equities. Thanks to strong growth, most potential can be expected in Russia and Turkey. Polish and Czech equity prices are close to fundamental value, though share prices in Poland will continue to be supported by domestic pension and investment fund demand.
 
Optimism about early EMU membership for some EU accession candidates has evaporated. Fiscal challenges prevent particular problems, particularly in Hungary and Poland.

Bond markets still attract investors
Credit spreads in Central and Eastern Europe are close to historic lows. Investor risk appetite is strong, credit quality has improved and further inflows into bonds from the region are expected.

Low spreads, however, should not be taken as a given. The rules of the “Old World” continue to apply to the sovereign credit markets of Central and Eastern Europe. As such, the eventual tightening of US monetary policy will work to widen spreads.

Focus shifting to EMU membership
As EU-membership is now a given fact, the focus in the region will be shifting to the next significant step in economic integration – the accession countries' efforts to prepare for membership in the European Monetary Union. The recent volatility of the Hungarian markets has demonstrated that the accession countries will have to pursue strict fiscal and monetary policies in the coming years to further gain investor confidence.


Inquiries: Bank Austria Creditanstalt International Markets  
Veronika Fischer-Rief; Tel: +43 (0) 50505 – 82833
Email: veronika.fischer-rief@ba-ca.com