Foreign capital inflows make a comeback to CEE, shows Erste Group report

Account deficit shrinks in Romania and FDI inflows expected in local capital goods industry, agriculture and the food industry

2010 brought a reversal of capital inflows into CEE countries, shows a recent press release issued by Erste Group. Foreign direct investments have started rebounding in CEE and The Czech Republic is the most notable presence in the region with FDI inflows more than double the levels recorded in 2010. As the report continues to show, current account deficits have shrunk considerably in Hungary and Romania – less external financing is needed.

“After a deep slump in 2009 (- 45 percent y-o-y), foreign direct investments have started to pick up (about 9 percent y-o-y). We see the most encouraging development in the Czech Republic, where FDI inflows more than doubled in 2010, making them the highest in the region,” stated Juraj Kotian (in picture), Co-Head CEE Macro Research at Erste Group.

Focus is also put on Romania’s situation with IMF, which shows progress made by Romania, continues the report: “The recent decision to replace the expiring IMF stand-by program in Romania with just a Precautionary Stand-By Arrangement (drawing funds is not expected) and not extend the previous program demonstrates the progress Romania has achieved.” As Kotian adds, on an optimistic note “Both Hungary and Romania narrowed their current account deficits substantially and thus reduced their external financing needs to levels which can be smoothly financed on markets.”

Moreover, Romania expects return of FDI inflows in capital goods industry, agriculture and the food industry, as shows the data issued by Erste Group analysts: “Before 2009, the main type of foreign capital inflows to Romania were FDIs (mainly equity stakes, due to privatizations) and other investments (cross-border loans and funding from parent banks), while portfolio investments have traditionally been low. After the onset of the global financial crisis, FDI inflows diminished, in spite of the fact that Romania remained an attractive business destination. Labor productivity in manufacturing increased by more than 12 percent in both 2009 and 2010 and real wage growth slowed down. The stand-by arrangement with the IMF and EU substituted for some of the private capital inflows to Romania and provided necessary time for the implementation of reforms and narrowing of the C/A and budget deficit. As the global economy recovers from recession, Romania is likely to benefit again from FDI inflows in areas like the capital goods industry, agriculture and the food industry, IT&C services and renewable energy, while the narrowed current account reduced the external vulnerability of Romania in the future,” declared Eugen Sinca, from Banca Comerciala Romana.