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25.10.2005

BA-CA Analysis:
After Asia, South-East Europe the most successful Emerging Market

  • Disproportionately high economic growth since 2000
  • Continued strong potential, especially in Romania and Bulgaria
  • Greater activity in the banking sector due to further privatisations and initial consolidation measures

Since the beginning of the political turnaround, South-East Europe1)  has become the world's fastest growing Emerging Market after Asia. With average GDP growth of a real five per cent since 2000, the region has easily outperformed the new member states in Central and Eastern Europe. The latter have recorded economic growth of around 3.5 per cent in real terms. In the opinion of Bank Austria Creditanstalt, the disproportionately high economic growth is attributable to political stability, but above all to the countries' rigorous anti-inflation policy. "The countries have succeeded in stabilising their exchange rates by pursuing a cautious monetary policy," says Marianne Kager, Chief Economist of Bank Austria Creditanstalt (BA-CA), at a press conference in Dubrovnik. According to BA-CA, the region will this year have an average inflation rate of about only 7 per cent, after more than 30 per cent in 2000.

Further reasons for the upturn currently enjoyed by the region are the commitment with which the countries commenced the restructuring process, and the consequent impressive successes achieved by them. The structural reforms were boosted by the approximation to the European Union. "The gradual adjustment to the acquis communautaire has significantly improved the region's business environment, which has thereby become more attractive for foreign investors," Kager says. 2006 is likely to see FDI of more than EUR 10 billion flow into the region, with the EU accession candidates Bulgaria and Romania, and in increasing measure also Serbia, attracting the attention of investors especially on account of their attractive privatisation projects. The inflows of foreign capital into the region will amount to over 5 per cent of GDP, which is well above the level of the new EU member states in Central and Eastern Europe, which have already largely completed the privatisation process. The EU is the region's most important investor, and Slovenia, one of the new EU members, is increasingly establishing itself as the gateway to South-East Europe.

Many new companies
Foreign direct investment is also helping to create many new export-oriented and import-substituting companies in the region, which will in the medium term contribute toward alleviating the economic problems which are still evident: high unemployment and the severe imbalance in net exports. The current account deficit will in 2005 average some 9 per cent of GDP for the region as a whole.

"Through the steady improvement of the general conditions the countries in the region, in the medium term, will be in a position to fully exploit their potential for growth and catch up on the new member states in economic terms," Marianne Kager maintains. BA-CA expects the region to achieve economic growth of about 5 per cent in 2005/2006. Bulgaria and Romania, which will in economic terms benefit significantly from EU accession in 2007, will be the growth leaders in the region.

Dynamic banking market
In the opinion of BA-CA, not only the economy but also the banking market of South-East Europe is making good progress. "With loans and deposits growing at an annual rate of about 30 per cent in recent years, South-East Europe's banking market has been much more dynamic than that of the euro area, but also more dynamic than the banking market of the new EU member states," says Kager. In this context, nearly all countries in the region are experiencing a sharp upturn, but Romania and Bulgaria in particular. After many years of weak growth, recent years have seen a reduction in the pronounced backwardness in terms of a low market penetration of banking services. Aside from the positive economic developments, this is largely attributable to the privatisation of the banking market and to the success in solving the problems associated with the bad loans carried over from previous years. These are the most important results of the latest study "Banking in South-East Europe", which BA-CA has today presented at the annual "Euromoney Conference" in Dubrovnik.

The study shows that the higher the proportion of foreign banks in a country, the more dynamic was the development of the banking market. The profitability of banks in South-East Europe is consequently also very high. It is about one quarter above that of the new member states and well above the profitability levels in the euro area. But also in terms of cost efficiency, measured by the cost-income ratio, the top banks in South-East Europe perform somewhat better than those in the new member states and the euro area.

Further growth and consolidation
Private loans are growing particularly strongly. Their volume has increased more than fourfold throughout the region since 2000, reflecting strong pent-up demand. The volume of private loans is nonetheless still low in an international comparison. The credit volume of just over 300 euros per person is significantly below the level of the new member states (800 euros), and amounts to only 3 per cent of the level of the euro area (12,400 euros). This relatively low initial level and the expected positive economic developments in the coming years suggest that South-East Europe's banking market will also develop favourably, BA-CA's economists believe. "South-East Europe will in the next few years be Europe's fastest-growing banking market, with loans growing by an annual 19 per cent and deposits by an annual 17 per cent", BA-CA's Chief Economist Kager maintains.

BA-CA expects that the region will experience consolidation of some kind or another. This is supported by the conclusion of the privatisation process in Romania and Serbia, and the fact that with over 220 banks South-East Europe today has more credit institutions than the new member states, although South-East Europe has 40 per cent fewer inhabitants. Two thirds of the banks however have a domestic market share of less than 2 per cent, and about 60 per cent of the banks have total assets of less than 100 million euros. BA-CA does not consider the leading position of Austrian and Italian banks in South-East Europe, which together account for almost 50 per cent of total assets of the overall banking market, to be threatened.

 Charts

1)  SEE= Albania, Bosnia-Herzegovina, Bulgaria, Croatia, FYR Macedonia, Romania, Serbia and Montenegro

For queries please contact:
Bank Austria Creditanstalt, International Press Relations
Edith Holzer, tel. +43(0)50505 ext. 57126, e-mail: edith.holzer@ba-ca.com