The inflow of foreign direct investment (FDI) in the EU halved in 2009 and particularly declined in the new member states – where the foreign sector is economically vital, writes the Vienna Institute for International Economic Studies in an analysis of FDI in 20 Central, East and South-East European countries based on the latest update of its database.
This analysis was authored by the Vienna Institute for International Economic Studies.
''After a year of stagnation, overall FDI inflows to the CEECs halved in 2009, to about the 2005 level. The setback was most serious in the new EU member states (NMS), less significant in South East Europe and the CIS. In the two latter regions, the 2009 inflows were similar to those reached in 2005, thus some achievements of the economic upswing period could be consolidated. Inflows to the NMS were nearly as low as in 2003, when the drop was related to the 'dotcom' crisis.
All NMS were seriously hit by the FDI decline in 2009. Two of them – Slovakia and Slovenia – booked negative FDI inflows, implying that accumulated capital reserves were repatriated. In some countries the setback was more than 50%, such as in the Czech Republic, Hungary, Latvia and Lithuania. Less hit were Poland, which showed the strongest economic performance overall, and Estonia, which consolidated its economic position.
The recent FDI decline in the NMS ought to be seen in the context of the very high FDI intensity attained in these countries. The foreign sector is important, often dominant in several sectors of the NMS economies. It contributes essentially to the overall economic growth performance in general and participates particularly in the severe declines in several countries of the region in 2009.
Importantly, equity investments were positive throughout the region in 2009 and comprised a much higher share of FDI than earlier. The resilience of equity FDI means that new projects and restructuring investments were not stopped even under the impact of the crisis.
As for the individual countries, in the Czech Republic, Estonia and Latvia, equity investments declined in 2008, but recovered slightly in 2009. Continuous high equity inflows of EUR 2 billion or more to Bulgaria, Hungary, Poland and Romania prove that these countries maintained their attractiveness for new investments.
In most NMS, reinvested earnings fell strongly as investors' incomes declined. In two countries most severely hit by the crisis, Latvia and Lithuania, reinvested earnings turned negative, as did the overall FDI-related income.
The main form of FDI flows responsible for the overall decline was 'other capital', which comprises mainly loans of the parent company to the subsidiary. Under the pressure of the financial crisis, such credits dried out, especially in the financial sector. In some cases it was the subsidiaries which credited the parent: 'other capital' inflows became negative in the Czech Republic, Estonia, Hungary, Slovakia and Slovenia.
South East European countries are still at a lower level of development and most of them attracted relatively less FDI than did the NMS, particularly in the export-oriented sectors. In some of these countries privatisation is still going on: this boosted FDI in Albania and Montenegro and mitigated the decline in Serbia. Inflows to Croatia fell to less than half of the previous year's level but continued to be the second highest in the region.
In all four European CIS countries investigated in the study, FDI declined in 2009 – less so in Belarus, which is in a delayed transformation process, and most severely in Moldova, where the inflow of FDI almost stopped completely. Inflows to Russia dropped by nearly half as compared to the previous year, in line with the severe GDP decline.
The consumption boom that had fuelled domestic market-oriented FDI, including real estate development in the past few years, came to a halt and investors postponed projects. In Ukraine the FDI inflow fell to less than half of the previous year's level as a result of the economic crisis and political uncertainties.
FDI outflows from the CEECs were more resilient to the crisis than the inflows to these countries. They fell by only one quarter, thus the net FDI position became more balanced: in 2009, overall outward FDI of the NMS accounted for 31% of the inward FDI, after a share of only 22% in 2008. Outflows were higher than in the previous year in the case of Estonia, Poland and Slovakia. FDI by Hungarian and Slovenian firms abroad fell somewhat but still much less than inflows, and outflows were higher than inflows, thus the net FDI of these two countries turned negative.
In 2009 the current account turned positive in four NMS and ran significantly smaller deficits in the others. Thus even the lower amounts of net FDI financed a larger part of the deficit than earlier. This was particularly advantageous for countries where the current account was in deficit and external financing constrained such as in Bulgaria and Romania. In South East Europe, the role of FDI is more restricted in financing the continuously high current account deficits.
In six out of ten NMS, more FDI-related income is taken out of the country than the amount of new FDI inflow. Still, the negative effects of the repatriation of FDI-related income can be balanced by other positions in the balance of payments. A positive foreign trade balance became the rule under the pressure of the crisis.
Forecasting the amount of FDI inflows for 2010 is not really feasible in the present circumstances. We nevertheless make an attempt based on global trends and the results in the first quarter of 2010. Thus, we expect FDI inflows to modestly increase in the region as a whole. Two countries indicate a strong revival of FDI – Poland and Russia, where economic growth will be strongest in 2010.
These (the largest) countries as well as the Czech Republic, Hungary, Slovakia and Ukraine are expected to contribute to the revival of FDI. Other countries, including Romania and Bulgaria among the NMS and the other South East European countries, may receive lower inflows.''