Despite the global economic slowdown and bouts of market turbulence, the transition
economies have avoided major contagion. In fact, many of them attracted more
capital and received higher international credit ratings in 2001. Mrs. Brigita
Schmögnerová, Executive Secretary of the Economic Commission for
Europe, observed that this favourable outcome was due to continuing structural
reforms (including privatisation), some strengthening of official reserves,
upgrades in international credit ratings and the willingness of investors
to differentiate among countries. In particular, the approach of EU accession
has helped to bolster foreign investors' interest in the candidates for EU
membership. The changes in the external financial positions of the transition
economies are one of the issues addressed by the United Nations Economic Commission
for Europe (UNECE) in the first issue of Economic Survey of Europe 2002.
Net financial flows to Eastern Europe increase; outflows from Russia slow
Despite the challenging international environment and weakening capital
flows to many emerging market economies, net financial flows to eastern Europe
(including the Baltic States) rose in 2001, to $28 billion (table 1). This
is still somewhat smaller than in the peak years 1998-1999, but the composition
of inflows has improved, shifting towards relatively stable FDI. The preponderance
of net FDI inflows ($20 billion in 2001) suggests that the bulk of capital
imports has been used for economic restructuring, and because FDI is generally
non-debt creating, there has been only a moderate increase in foreign debt.
In Russia, the large net outflow of capital slowed in 2001, although significant
capital flight continued. This outflow has been possible because of the country's
huge current account surpluses ($34 billion in 2001), which also resulted
in record official reserves. Overall the financial account of the transition
economies (including errors and omissions) is estimated to have moved from
a small deficit in 2000 to a small surplus in 2001.
Foreign direct investment rises again
FDI in the transition economies proved resilient in the wake of the Asian
and Russian financial crises (1997-1998) and again during the global slowdown
in 2001, increasing to over $28 billion (table 2 and the chart). There had
been some concerns in early 2001 that FDI would diminish as global economic
prospects weakened. While this may have occurred in some transition economies,
the strategic goals of multi-national corporations - acquisition of assets
undergoing privatisation, lowering costs with efficiency-seeking investments
and establishing a presence in EU candidate countries - seem to have dominated
cyclical considerations. In general, FDI flows in the ECE transition economies
remain heavily influenced by governments' privatisation decisions, but the
role of this factor will diminish as the stock of state assets is exhausted.
FDI flows to Russia remained relatively small while resident investment abroad
continued, resulting in a net outflow for the second year running. Russia
has a huge potential for attracting FDI, especially in the oil and gas sectors.
However, foreign investors continued to have doubts about the investment climate
in 2001, despite the fact that significant economic reforms were under way.
International credit ratings continue to improve
Although the global market environment weakened, Fitch, Moody's and Standard
& Poor's have upgraded the international credit ratings of ten transition
economies since the beginning of 2000 (table 3). As of February 2002, eight
EU accession countries - the Czech Republic, Estonia, Hungary, Latvia, Lithuania,
Poland, Slovakia, and Slovenia - had received investment grade ratings (as
had Croatia). Bulgaria and Romania are rated sub-investment risks, although
both have been upgraded recently. The better credit ratings reflect improvements
in macroeconomic fundamentals and policies, progress in economic reform, including
meeting the requirements of EU accession (i.e. adoption of the Acquis Communautaire)
and stronger financial positions. Azerbaijan, Kazakhstan, and Russia received
upgrades in 2001 but they remained in the sub-investment grade category. Since
early 2000, Russia has been moved up three notches, thanks to its much-improved
fiscal and liquidity positions. Only Hungary had been rated prior to the transition.
Bond issues show signs of recovery
Bonds issued by the transition economies amounted to some $6.3 billion in
2001, about $1 billion more than in 2000. The majority were sovereign and
municipal issues, but there were also a few corporate bonds from energy producers
in Kazakhstan, Russia and Romania. Terms on the new issues of several countries
continued to improve despite the unpropitious climate and many were heavily
oversubscribed. This reflects international investors' search for higher yields
while seeking what are perceived as less risky investments. The modest overall
level of issuance by creditworthy countries reflects the availability of alternative
finance, especially FDI. Several countries borrowed to finance government
budget deficits.
Although the emerging market economies as a whole have suffered from heightened
risk aversion, creditworthy transition economies have benefited from the increased
willingness of investors to differentiate between borrowers. The combination
of economic restructuring and macroeconomic stabilization, improved financial
indicators, credit rating upgrades and closer association with the EU is likely
to make the accession countries less vulnerable to external shocks and financial
crises. The absence of serious contagion from Argentina and Turkey supports
this view. Further credit upgrades will depend inter alia on a continuation
of structural reforms and keeping imbalances in check.
Table 1 - Net capital flows
into the ECE transition economies, 1998-2001
Table 2 - Foreign direct investment
in the ECE transition economies, 1998-2001
Table 3 - Fitch credit ratings
for the transition economies and changes in 2000-2002
Chart 1 - Foreign direct investment in the ECE transition
economies,
1994-2001
(Billion dollars)
Source: UNECE secretariat, based on national balance of
payments statistics.
For further information please contact:
UNECE Economic Analysis Division
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Tel: +41(0)22 917 24 79
Fax: +41(0)22 917 03 09
E-mail: [email protected]
Web site: http://www.unece.org/ead/ead_h.htm