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Foreign Capital Inflows Make a Comeback to CEE

Published: March 30, 2011; 00:02 · (Vindobona)

Foreign direct investments picked up by 9% in CEE; Czech Republic scored best in attracting FDIs, says Erste Group.

Foreign Capital Inflows Make a Comeback to CEE / Picture: © European Commission

2010 brought a reversal of capital inflows into CEE countries. “After a deep slump in 2009 (-45% y/y), foreign direct investments have started to pick up (about 9% y/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. Good news also came from Hungary, where the negative trend has been reversed for the first time after the crisis, as well as from Slovakia and Ukraine. We also notice the markets are one step ahead rating agencies, having already acknowledged the strong fundamentals in CEE: CDS spreads are tighter than those of southern European countries,” commented Juraj Kotian, Co-Head CEE Macro Research at Erste Group.

Many CEE economies managed to stand on their own feet throughout the crisis (the Czech Republic, Slovakia, Poland and Croatia) and without severe tensions in external financing. Some countries had to undergo an economic rebalance (Hungary, Romania, and Ukraine) and adopt corrective measures, including structural reforms. Coordinated IMF & EU assistance has lowered the pressure on their external financing and helped them implement measures to narrow imbalances.

On the other hand, Euro Area countries that faced a shortage of private capital inflow (Greece, Portugal) were able to buy time due to access to ECB refinancing, which served as a substitute for private capital inflows or external assistance. Thus, they were not pressured to correct their large external imbalances. Unfortunately, this “palliative” was short-lived and came without strict conditions, which meant the imbalances of southern Euro Area countries persisted or even grew in 2010, while CEE countries narrowed their current accounts substantially. Despite this marked contrast, it took rather long for markets to realize that many CEE countries are in a much better shape than some Euro Area members.