1. News September 27th, 2011
Eastern European States, the ugly ducklings of
Europe, become more beautiful in the eyes of
Western investors scared by the crisis
Market fears about the
financial and economic
problems in the euro area
and U.S. political tensions
make Central and Eastern
Europe (CEE) to be more
attractive to investors, but
also there crisis began to
erode this confidence.
CEE is seen by investors and analysts as the extreme version of Western Europe. Whilst Western
economies grow very slowly, the Eastern drone, but when the West is bad, the East is terrible, says
CNBC in a study on CEE.
Financial and economic crisis have shrunk the areas where investments are safe. In this context the
eastern economies, which only two years ago faced with sudden stop of capital flows, are courted by
investors looking for higher earnings and secure. Countries in the region have taken drastic
measures to reduce public spending and maintain budget deficits under control to regain market
confidence and are now considered to be in better shape than Western economies.
"States in CEE have implemented structural reforms and are more successful than developed
countries", says Peter Montalto, an analyst at Nomura.
Cost of insurance against default (credit default swaps - CDS) for CEE countries is lower than in
recent years in euro area economies. CEE is also better in terms of debt relative to GDP.
Eastern European states are better than the West in terms of debt
In the euro area, the average ratio debt/GDP is 85%. In Poland, the indicator is 55% and in the
Czech Republic and Slovakia is 38% respectively 41%, according to Eurostat from the end of last
year.
Swiss central bank's recent action to limit exchange rate franc/euro in order to prevent fatal
appreciation for the economy and for those with loans in Swiss francs will stimulate investment in
the CEE region, considers Montalto. He warned however, of the danger of the emergence of
speculative bubbles.
Eng. Paul Keisch Page 1
2. News September 27th, 2011
On the other hand, as the euro zone crisis intensifies, eastern economic outlook darkens. The region
is highly exposed to fluctuations in trade with the richer states in Western Europe.
"Currently, all CEE markets are affected by contamination of euro zone problems. Investors are
cautious in this region, particularly the ones from U.S.A who were skeptical about the euro zone",
said Simon Quijano-Evans, chief economist of ING. He noted that credit rating agencies tend to
improve ratings emerging European economies and to demote those of countries in the euro zone
bonds supports investments in eastern states.
Mobius: In Eastern Europe can invest successfully, but should be carefully
Mark Mobius, president of Templeton Emerging Markets Group, which owns Romanian Property
Fund, believes that CEE is still a place where you can invest successfully if attention is given to
selected sectors and activities.
"In CEE the stock markets haven’t performed badly, but growth rates are relatively low. Feeling that
gives the macro picture is not as exciting, but at the company level can find opportunities because
the values were quite low", says Mobius.
In 2009 CEE currencies fell sharply as a result of massive capital withdrawal by foreign investors,
which raised fears that the economies will collapse causing damage to the world.
UniCredit analysts consider that low inflation should help the region combating the effects of
economic slowdown in the euro zone and U.S.A, given that domestic demand will rise, probably due
to increased purchasing power.
Currencies of Eastern Europe are beginning to feel the tensions in the euro zone
The Polish zloty is the worst performer this quarter among CEE currencies, depreciating by 13.7%
against the euro during this period, according to the ECB. Over the same period, the Romanian leu,
the Czech koruna and the Hungarian forint fell with 1.7%, 2.3% and respectively 10.1%. Poland is
penalized by investors while the weak economic growth and October 9 elections have raised
speculation that Prime Minister Donald Tusk will not succeed to reduce the budget deficit below the
required level the candidates were asked for when entered into the euro zone. The government
relies on a 4% economic growth next year, while banks Goldman Sachs and Bank of America
reduced their estimates from 4.2% to 3.8% respectively from 3.7% to 2.9 %.
"Until recently the Zloty was Europe, Middle East and Africa darling. Those times are gone", said
Benoit Anne, an analyst at Societe Generale.
Eng. Paul Keisch Page 2
