FDI In Eastern Europe

The Economist this week:

Foreign direct investment into eastern Europe hit a record US$112bn in 2006, putting the region ahead of Latin America and second only to Asia among emerging markets. Privatisation was again a prominent driver, and its near-exhaustion points to a weaker FDI performance in 2007 and beyond, for eastern Europe is failing to rise to Asia’s competitive challenge. Moreover, there is little evidence yet that EU enlargement is sparking a massive relocation of production within Europe, from West to East.

According to final official data reported by the region's central banks or statistical authorities (supplemented in a few cases by Economist Intelligence Unit or IMF estimates), FDI inflows into the transition economies reached a record total of US$112bn in 2006, up by 45% on the US$77bn received in 2005. The region thus displaced Latin America and the Caribbean as the second most important emerging-market destination for FDI after Asia. Three economies in the region were among the ten emerging market FDI recipients in 2006--Russia (3rd), Poland (8th) and Romania (10th). The US$112bn total inflows represented almost 5% of the transition region's GDP, the highest ratio achieved thus far. For the Balkans the FDI inflows/GDP ratio exceeded 10% in 2006, and it was almost 8% for the Baltics.

There was a very strong increase in FDI flows into Russia, which more than doubled in 2006 to US$28.7bn. The lure of ample market opportunities and very strong consumer spending growth in Russia more than offset the impact of some deterioration in the business environment--especially as far as investment in natural resources is concerned.

FDI inflows into Poland reached US$13.9bn in 2006, a 45% increase on 2005. Unlike in most other high-FDI recipient countries in the region, Poland’s total owed little to privatisations in 2006. The ongoing real-estate boom underpinned much of the increase in FDI, as did an increase in reinvested earnings, indicating growing confidence in the Polish economy. The large US$10.3bn inflow into Hungary was boosted only to a limited extent by large deals such as the US$1.3bn acquisition of MOL's natural gas storage and wholesale trading businesses by Germany's E.On.

Elsewhere, large privatisation deals accounted for a significant portion of FDI inflows in 2006. Fast-growing Romania attracted inflows of US$11.4bn in 2006. Some US$2.8bn of the total was based on the purchase by Austria's Erste Bank of a stake in the country's largest bank, Banca Comerciala Romana. Slovakia’s FDI inflow of almost US$4bn in 2006 partly reflected privatisation inflows from the sale of the power generator Slovenske elektrarne (SE) to Enel (Italy). Croatia's US$3.5bn FDI inflow was based on the sale of pharmaceuticals giant Pliva to Barr for US$2.5bn, and to a lesser extent, another round of privatisation of oil and gas company INA (for some US$500m). In Lithuania the US$1.8bn inflow in 2006 was boosted by the sale of the government's stake in the oil complex Mazeikiu Nafta to Poland's PKN Orlen for US$852m.