Taking the fast train to South-East Europe

  • Record inflows of foreign direct investment into SEE in 2004
  • Total FDI volume increased to more than 40 billion euros
  • Bulgaria and Romania especially benefit from the upcoming EU accession

Reform measures taken in South-East Europe  (SEE) have helped to dramatically improve  economic and legal conditions in SEE. The Balkan countries have become a prime location for foreign direct investment (FDI) in the past five years. “In 2004, the volume of foreign direct investment into the SEE countries has exceeded 8 billion euros. This is a new record. The figure is equivalent to roughly 5 percent of the region’s GDP,“ says Marianne Kager, Chief Economist at Bank Austria Creditanstalt (BA-CA). According to estimates by BA-CA’s experts, the region has already absorbed almost 41 billion euros in cumulative FDI, representing an almost fourfold increase in volume in just five years.

The EU candidate countries Romania and Bulgaria have become the preferred targets for foreign investors in 2004. “Romania was the absolute front-runner, absorbing 50 percent of FDI flows into SEE,“ says Kager. This development was mainly driven by the privatisation of the Romanian oil company Petrom and the utility companies Electrica Dobrogea and Electrica Banat. Bulgaria absorbed nearly a quarter of the total volume of FDI in 2004 thanks to the privatisation of 7 regional power companies and the sale of a stake in the local Telecom company.
Despite the recent dynamic growth, the penetration level of foreign capital in the economies of SEE is still relatively low. Per capita FDI only amounted to about 800 euros. By way of comparison, the figure is 2,200 euros per capita in the New Member States (NMS-8). Croatia, however, stands out from the crowd in this regard, with its per capita FDI of 2,300 euros even higher than the average for the NMS-8. Bulgaria ranks ahead of Romania with 1,100 euros compared to some 700 euros. The postponement of EU accession talks could make Croatia less attractive for FDI’s, and its lead over other countries could narrow.

Improvement of overall conditions
Overall conditions in the countries in the region will have to be further improved in order to maintain the current strong influx of capital from abroad independently of privatisation projects in order to continue closing the gap to the countries in Central Europe. Many potential investors remain hesitant of taking advantage of the opportunities which are opening up because of unresolved problems such as inefficient processes in public administration, difficulties associated with enforcing legal claims, legal regulations which deviate from EU law, corruption, or the general political environment. “The prospect of eventual membership of the European Union is a strong incentive for the countries in South- East Europe to continue pushing forward with their economic reforms. As these efforts bear fruit, we can expect to see a steady improvement in the conditions for foreign investment in the countries in this region, which will also be reflected in an unbroken strong inflow of FDI", says Kager. In 2005-2006, BA-CA’s economists estimate that more than 8 billion euros will be invested in the region each year.

From an overall economic perspective, the SEE countries have a lot of potential. They are among the growth leaders on the continent. In 2004, average economic growth in the region soared to 6.5 percent, with Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Romania and Serbia and Montenegro growing much faster than the new EU Member States (NMS-8), which nevertheless achieved robust economic growth averaging almost 5 percent.

Enquiries: Bank Austria Creditanstalt, International Press Relations
Edith Holzer, phone: +43 (0)50505 ext. 57126,  mailto: edith.holzer@ba-ca.com