Foreign direct investment in Central and Eastern Europe will rise to about EUR 20 billion annually in 2004 and 2005, according to a forecast by Bank Austria Creditanstalt (BA-CA).
“EU enlargement has enhanced the attractiveness of Central and Eastern Europe. Contrary to the pessimism expressed by some economists, we think that foreign direct investment in the region will rise,” says Marianne Kager, Chief Economist of Bank Austria Creditanstalt.
In 2003, foreign direct investment declined by one half, to EUR 13.9 billion, compared with the 2002 level. This decline was attributable to the lower number of privatisation transactions and to restraint shown by large international companies with regard to investments in view of the economic environment. Moreover, the fall in FDI was also due to special factors such as the repurchase of equity interests from foreign owners.
“In the short term, as the number of privatisation transactions decreases, direct investment is not expected to return to the high levels seen in 2002,” Marianne Kager explains. “However, investments will be more effective in improving output because they are now focusing on the expansion and modernisation of companies rather than changes in ownership.”
At the same time, the volume of borrowing abroad will continue to rise, thanks to expected investments in the expansion and improvement of production. Hans Holzhacker, an economist at Bank Austria Creditanstalt, expects aggregate foreign debt of the new EU member states plus Bulgaria, Romania and Croatia to grow from EUR 254 billion in 2003 to about EUR 280 billion by 2005. Since the mid-1990s, the structure of foreign lenders and of borrowers in Central and Eastern Europe has changed considerably. In all countries except Croatia, the public sector’s share of foreign debt fell significantly until 2003, while the corporate sector’s share of foreign debt increased. The Czech Republic and Slovakia were the only countries where the trend reversed in 2003, a fact which was attributable to the large budget deficit and a relatively low level of corporate demand for loans from foreign lenders.
At the same time, the significance of public lenders and organisations such as the International Monetary Fund as lenders has declined sharply. In most countries, private lenders (companies and private bondholders) and commercial banks account for over four-fifths of total foreign debt. Bank Austria Creditanstalt’s economists think that financing by private lenders and banks will continue to gain in importance thanks to the continued increase in cross-border activities of European companies.