Foreign investments in Central and Eastern Europe take a major knock, recovery will be gradual, warn PwC economists
Five bumper years of foreign direct investment (FDI) in Central and Eastern Europe took a hammering last year as the effects of the credit crunch and recession bit, according to PricewaterhouseCoopers economists.
And the evidence suggests that FDI in the region is likely to recover only modestly from 2010 onwards, said the report, “Foreign Direct Investment in Central and Eastern Europe: A case of boom and bust?”
The PwC research reveals that the CEE region enjoyed a five-fold increase in FDI inflows between 2003 and 2008, rising from US$ 30 bln to US$ 155 bln. Russia has been the major beneficiary, as inflows here rose from less than US$ 8 bln in 2003 to more than US$ 70 bln in 2008.
But estimates show that in 2009, FDI to the region slumped by 50% to US$ 77 bln. Much of the blame for this collapse can be laid at the door of the real estate sector, where FDI declined by a massive 71% in 2009 compared to the previous year.
“CEE and of course Russia are the main markets in which companies using Cyprus as their base invest in. With the FDI expected to be lower, Cyprus must intensify its efforts to expand its share in this area,” said Panikos Tsiailis of PwC Cyprus and Leader of Tax and Legal Services.
“The uncertainties surrounding the double tax treaties with Russia and Ukraine must be cleared immediately to enable Cyprus compete on a level playing field,” he added.
The picture has not been uniform across the region; analysis by the PwC economists revealed that FDI as a share of GDP varied from country to country, depending on such factors as income levels, manufacturing labour costs, investment risks, and status of EU membership.
However, the research does show that, even without the impact of the global recession, sharp rises in labour costs in the run-up to 2008 in the region may well have caused a slowdown in FDI.
“And we suggest that FDI inflows will not immediately bounce back to previous highs,” said Yael Selfin, PwC's head of macro consulting. “The bust which followed the long boom will have persistent effects in the region; it could take until 2014 for the region’s FDI inflows to surpass the 2008 level.”
Two important factors to determine the recovery path of FDI flows to the region will be the speed with which investors’ perception of country risk moderates, and how quickly the region’s wages – relative to countries like Germany – start to pick up again.
