Inflows of foreign direct investment (FDI) to Emerging Europe soared by 45% y/y in 2016, with the recovery driven by Russia and the EU member states of Central Europe.
A new report from the Vienna Institute for International Economic Studies (wiiw) shows that FDI recovered by 23% in Central Europe, while it expanded at an outstanding rate of almost 150% in the Commonwealth of Independent States (CIS-4) and Ukraine, with Russia in particular seeing a sharp upturn in investment.
The stars of what wiiw terms the Central, East and Southeast Europe (CESEE) region were the Czech Republic and Hungary. In the Czech Republic real estate investments predominated. 2016 saw the largest ever real estate deal in the Czech Republic, with the sale of P3 Logistic Parks to Singaporean sovereign wealth fund GIC. The €2.4bn transaction was the largest on the European real estate market last year.
Meanwhile, Hungary saw more manufacturing sector investments, especially in the automotive and auto components sectors. This increase in FDI came despite an overall decline in investment in the country reported by the local statistics office.
“Both [the Czech Republic and Hungary] received amounts that were the second largest since 2008, surpassing the 2015 slump by a wide margin,” the report noted, also pointing to higher FDI inflows in Romania, Croatia and Estonia.
Russia was another standout performer, with FDI veering sharply upward during the year, albeit to a large extent influenced by the murky sale of a 19.5% stake in oil major Rosneft for €10.2bn – one third of total inflows – to oil trader Glencore and the Qatar sovereign wealth fund announced in December.
Aside from the Rosneft deal, however, the recovery in Russian FDI was also a product of more positive economic trends. “The decline of the economy levelled out and more FDI was attracted by reduced import competition into sectors affected by the sanctions (mainly food production),” the report said.
FDI also edged upward in Ukraine, although wiiw pointed out that, “The elevated investment risk is reflected in the low FDI inflow compared with the size of the country.”
Onwards and upwards
Going forward, the picture for the wider CESEE region is also a positive one, with FDI set to exceed the heights reached in 2016. “The trend in CESEE is expected to continue due to robust economic growth in the region and a somewhat lower but still stable growth in the major investing countries,” the report said.
“Economic growth in most of CESEE is bound to be more robust than in the previous year. Both consumption and investments recover and attract foreign companies in the EU-CEE and the Western Balkans,” it said. “These regions have maintained cost competitiveness, despite surging wages and occasional labour shortages, by benefiting from considerable productivity improvements.”
Despite uncertainties in the international economic environment, these forecasts have been borne out by first-quarter developments in several key economies, in particular by the greenfield FDI projects announced in Hungary, Poland, Romania and Serbia.
However, it wasn’t all good news. Rising FDI in CESEE took place against the backdrop of falling global FDI, mainly attributed to lower foreign investment in China. And while Central Europe and the CIS-4 plus Ukraine regions powered ahead, Turkey reported a 30% decline in FDI, while a more modest 7% tailing off was seen in the Western Balkans. Notably, this was a reversal of the situation the previous year, when Turkey and the Western Balkans outperformed their peers to the north and east.
Yet the decline wasn’t uniform across the Western Balkans. Serbia, its largest economy and top recipient of FDI, maintained inward FDI levels similar to the previous year, driven upwards by major inward investments like the Chinese HBIS’s takeover of its second largest exporter, the Zelezara Smederevo steel mill.
Albania was the second ranked recipient of FDI, with investments concentrated in the energy sector. Albania’s FDI inflows actually rose above the pre-crisis period, and Macedonia also –somewhat surprisingly – saw an increase in FDI in 2016, despite the political crisis that weighed on the country’s economy throughout the year. “Suppliers of the automotive industry and electronics make [Macedonia] unique in the region, with its high share of FDI in manufacturing,” the study explained.
On the other hand, Bosnia & Herzegovina “was less successful than in earlier years, probably on account of its increasingly segmented economic and regulatory environment”. Bosnia’s growing political divisions and the rifts among its two entities and central government are deterring foreign investors; in February German retailer Lidl was the latest to reportedly decide against entering the country due to its political instability.
In terms of the origin of investments, the top country sources are the Netherlands, Germany and Austria. Austrian investors have particularly targeted countries in their immediate neighbourhood, being the top source of investment for Slovenia, Bosnia and Croatia, and ranking second in Bulgaria, the Czech Republic, Romania, Slovakia, Macedonia and Serbia.
On the other hand, the region became notably less important for Austrian investors in 2016, accounting for only 31% of Austrian outward FDI stock in 2016, down from 36% in 2015 and 46% in 2012. “Overall Austrian FDI outflow turned negative in 2016 and continued its shift away from the CESEE countries, mainly in favour of Asia and the Netherlands,” the report said.
Aside from Germany and Austria, much of the investment in the region was from low-tax countries such as the Netherlands and Luxembourg, where many investments were concentrated in holding companies for tax reasons.