Central & Eastern Europe Investment: Diversity in convergence
If there is one conclusion to draw from our survey of the investment opportunity in Central and Eastern Europe (CEE), it is the importance of acknowledging the diversity of the region.
This comes out in our overview of the region’s government bond markets, stands at the heart of our lead article, which opens with the recognition that the very concept of ‘CEE’ is relatively new, and comes through in our attempt to survey the region through social and economic data.
Turkey is, of course, in a geographical and cultural category all by itself – but merits inclusion thanks to its proximity and disproportionate impact. But even within the more widely-recognised bounds of CEE, there is a diversity of economic status and investment opportunity commensurate with diversity of location and political history.
It would be easy to assume that the Central European states like the Czech Republic and Poland, with their lucrative links with German industry and, increasingly, access to the EU’s single market, stand well apart from the struggling former Soviet states like Ukraine and Moldova. While concerns around the lack of structural reform seem to be particularly acute there, one could say much the same about Hungary, for example. Equally, one can point to the comeback economies of the Baltics, which benefit from links with both the Nordics to their north-west as well as Russia to their east.
The diversity also comes across in the countries we choose to focus on in our opening pages: Serbia, now a candidate for EU membership after broaching the Kosovo question; Turkey, once a darling among investors but now struggling with its deficits and an increasingly divisive political scene; and Latvia, which has just joined the euro-zone, and Lithuania, which looks set to do so next year.
CEE’s recovery, after several tough years, appears to contrast with the slowdowns, after a generation of growth, in Asia and Latin America. Moreover, that more attractive trajectory is on offer at a 30-40% discount. Nonetheless, selectivity will be important. The political elements will prove significant, because the investment case for many of these countries rests upon their attractiveness as a destination for FDI from western Europe, as industrial input costs start to look competitive next to those in emerging Asia – themes explored further in our coverage of activity in the region’s private markets (pages 48-49), and in our final article looking at the implications of improved competitiveness in southern Europe.
Spain, especially, could now present its own threat to the ‘emergence’ of the east. The measure that turned out to be more important than any other during 2013 – the current account balance – has turned positive in all of the southern ‘peripheral’ euro-zone economies. We finish our report by comparing and contrasting these two European ‘peripheries’, and conclude again that it is just as important to recognise the differences within these regions, as well as the differences between them.