Projections 1 The Southeast European

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

1. The Southeast European region: What follows next? Economically speaking, the countries of the region have already faced and sustained the grave threats of the crisis and figures already show slight trends of stabilization and growth (see Table 1 below). Although rates of unemployment have risen significantly for the period 2008-2009, and access to finance has become more expensive and difficult to obtain, no signs of major economic, political and social disturbances were evident, nor there are present any projections for such. Even more, national governments, central banks, lending institutions and versatile international financial institutions (IFIs), active in the region, have taken timely and decisive measures to safeguard confidence in the economies and most of all - to secure the further implementation of ongoing transition reforms.

Graph 1: Growth in real GDP (2006-2011)

Source: World Bank, IMF, World Economic Outlook

With EU countries being the main export trading partner for all of the Southeast Europe countries (e.g., over 50% of the exports of all countries are EU related), it is expected that investment interest in the region, especially in the segment of strategic investment, will come mainly from EU based entities. One reason for this is the relatively small size and export orientation of the economies in Southeast Europe and hence - the lack of considerable interest from global investment stakeholders, who tend to be active in larger, faster-growing markets, such as India and China. On the other hand, with all Western Balkan countries being subject to intense funding for structural and market reforms from the EU, the foundations for an EU friendly economic environment are being laid. Once these countries successfully accede to the EU, they will be integrated within a market of over 500 million people and will have transposed European legislation within their national systems. In this respect, it will be easier and more cost effective for European companies to expand their operations networks to countries with lower transition costs, but uniform EU administrative and legal framework.

Presently, a few factors are determining which countries will be the first to arrest crisis conditions and hence - become an investment hotspot. One factor is the different level of progress in economic and social matters these countries have achieved in previous years. With GDP of nearly $14,500 per capita (2009), Croatia is hardly to be put on the same scale with countries such as Albania (GDP p.c. $3,824.8 in 2009), or even neighboring Bosnia & Herzegovina (GDP p.c. $4,278.5 in 2009) (see Table 1 below). For a progress in figures in Albania will not necessarily translate into a sizeable advantage of investment conditions there, in so far levels of workforce sophistication and functioning market and rule of law institutions are still low and reforms take place slowly. In other words, what will be regarded as progress at one country, will be considered dire conditions in another, and will not bring to a sensible draw of foreign investment capital.

Table 1: GDP per capita (US$)







Bosnia and Herzegovina
























Source: World Economic Outlook 2010, IMF; Global Competitiveness Report 2009-2010

On the other hand each of the Western Balkan countries has adopted different approaches in tailoring crisis response packages and it is not yet clear which of these will prove successful, which not. As a general counter crisis reaction, governments have pledged securitization for bank deposits and have managed to sustain liquidity, even at lower volumes and a hard access to finance. Unlike sizeable Western economies, such as the USA, Germany and the UK, however, none of the local governments was able to adopt and earmark a large deficit-spending program, aimed at enhancement of private demand. With restrained access to international capital markets, it was only Croatia, who in 2009 succeeded to raise a total of nearly 2 billion EURO from capital markets.

Fiscal measures were taken in the whole region, as Romania announced in February 2009 a 13 billion EURO counter crisis stimulus package, which, however never gained momentum and is considered by experts as more "imaginary, than real". Other crisis responses across other countries of the region included tax breaks, investment loans at subsidized rates to business (in Serbia), business facilitation measures, such as the implementation of a one-stop-shop for doing business in Macedonia, among others. The range and intensity of these interventions, however, even though too early to estimate, has been sufficient to prevent major collapses and disturbances in the economies, but not to lead to considerable improvements in investment or doing business environment in any of these countries.

Sizeable and adequate assistance from international entities, such as the EU, IMF, the World Bank and other IFIs, including EBRD, EIB and CEB has also contributed to a large extend for the preservation of confidence in the region and for lowering risk perceptions. As a general conclusion from all foreseen and undertaken counter crisis measures in the region, however, it is clear, that due to the relatively small size of the economies and their general dependence on outbound markets, it is not only from within that changes will come. More likely, it is to be expected, that once the EU economy, and precisely the eurozone shows resolute signs of stability and growth, and once Asian markets show signs of saturation, it is then when more considerable interest on Western Balkans economies and markets should be expected. In other words, the first countries to overrun crisis conditions will be probably the countries with better investment potential, as change is expected to come from outside, rather than from inside the countries.

3. The SEE countries after the crisis in terms of investment attraction

As of 2010, the projection of this report is that the first countries to indicate better economic performance and to headline a new investment trend in the region will be Croatia, Bulgaria and Romania, followed by Serbia and Macedonia. Among the main reason for this projection is the fact, that these countries are the most advanced in their relations with the EU (i.e., Bulgaria and Romania are full right members since 2007, while Croatia is an officially recognized candidate), hence subject to most intense EU funding for the real sector. They also enjoy the statute of a recognized by the EU functioning market economies and project human capacity preparedness to institute reforms and provide guarantees for the security and sustainability of foreign investments.

Present fiscal deficits and the large share of Greek owned banks in the financial sectors of the proposed countries pose uncertainty (i.e., 30% of the Bulgarian banks are Greek owned), however, crisis response packages are being underway and there is a pledged readiness by Austrian and other foreign banks to fill the credit lending niche, once overall business environment shows better signs of improvement. Additionally, in the case of Croatia, Greek banks are not a major obstacle to fiscal security, as banks there are mostly Austrian and Italian owned.

Looked from a different perspective, Romania, Bulgaria, Serbia and Croatia happen to be the countries with largest market size among the whole set of countries surveyed. Generally dealing with crisis conditions on a bigger market translates into a bigger concern, but in this case, although biggest in the region, these countries do not enjoy tremendous market sizes in real terms (the biggest market is Romania with 21.3 million people population and $199 million GDP in 2008). Provided they all hold a stable political stance and sufficiently well developed infrastructure in transport, ICT and energy, it is to be expected, that bigger market size will be one of the key drivers to investment activity. Additionally, the same four countries, including Macedonia, share the first places for intensity of local competition, according to 2008 World Economic Forum data. This should be regarded as another clear sign of a higher degree of administrative, economic and market preparedness of the country, which is supposed to safeguard investment in the shorter term and promise profits and growth in the long term.

Another advantage of three of these countries - Romania, Bulgaria and Croatia - is the fact, that they are currently subject to the largest volumes of EU funding available in the region. To facilitate and improve the process of aid utilization concrete measures are being adopted in Bulgaria. The new government assigned an EU funds minister and announced determination to double the figures of funds utilized and projects approved. Present issues, related to this matter are administration incapacity, alleged corruption and slow procedures, which, if sided, will give way to extensive structural aid streams for the sectors Rural development and agriculture, Infrastructure, Manufacturing and IT, Environment and others. EU funds utilization landscape in Romania is generally similar, with indicators showing slightly better performance in the matter than Bulgaria. Put together, the two countries have to utilize approximately 26 billion EURO in EU structural aid for the timeframe until 2013, which is a considerable driver of attraction for foreign investors.

On the other hand, implications with the fiscal deficit of Bulgaria occurred in April 2010. After a meeting of the Council of the ministers of finance of the EU countries in Madrid the same month, however, the convergence program of the government has been approved and the country is also expected to apply for entry in the euro zone. An eventual introduction of the euro will further enhance countries' competitiveness and lower interest rates by projected at least 3 percentage points. Introduction of the euro currency in Bulgaria and Romania is not due to happen in the next 2 years at minimum. The process of monetary integration, however, remains a priority for the national governments of the two countries.

Croatia is the country showing considerable potential for investment attraction in the coming years. Figures from previous experience show, that in years prior to EU accession, FDI inflows in a country mark a remarkable growth. With Croatia being almost done with the negotiation process and hence - shows compliance with EU accession criteria, a soon coming accession is to be expected. The possible accession of Croatia, among all, is regarded to send a positive signal to the overall development and process of integration of the whole region. Croatia has a well developed and maintained transport infrastructure network, benign tax and corporate legislation. Commendably, the country ranks first among the Southeast European countries in Innovation readiness, according to 2008 WEF data. While capacity for innovation ranks 52nd worldwide, the same factor ranks 64th in Romania, 120th and 121th in Bosnia and Albania, respectively.

Two of the countries already mentioned - Serbia and Macedonia should be regarded as successors of the first group of countries, in so far both have functioning market economies (Macedonia is the second country in the region, after Croatia, to assume an official EU candidate status, which, among all, means a functioning market economy), but reforms are still due and in general these countries cannot yet present the security of investment and the access to markets EU members Bulgaria and Romania can. At the same time these countries have a well established and developing infrastructure, especially in energy supply, as well as educated and skilled workforce, which is not the case with Albania, Kosovo and Bosnia. Projections for EU accession are not made for a date prior to 2014, fortified investment interest there, however, is to be expected earlier.

The rest of the countries - Albania, Kosovo, Bosnia & Herzegovina and Montenegro are currently subject to intensive funding by both the EU and IFIs with the general aim to enhance necessary reforms in administration, fiscal policies and labor market efficiency and pave the road for EU membership and FDI. Commendably, despite crisis conditions Albania and Bosnia & Herzegovina continue to carry out reforms and to register the highest rates of GDP growth in the region (starting from a lower point than the other countries). However, lacking infrastructure in energy and water supply in Albania are a general concern for investment and general economic development. As stated, however, being prioritized for subsidies by international institutions, these deficiencies are due to be sided in the near future, as also improvements in judiciary and workforce capacities are expected. In conclusion, although performing well in current crisis conditions, these countries have a long way to go before being able to turn into a sound investment hotspot. This is likely to happen in the years after 2014, when reforms will have taken effect and EU accession will find place. Until then major capital inflows are expected to come predominantly from international entities as the EU, USAID and IFIs in the form of structural aid and lending.

4. Sectors of interest in the near future

Privatization, low labor cost, taxes and close proximity to European markets have been among the main drivers of investment interest in the years prior to the crisis. Rates of pre-crisis growth, however, planted the seeds of raising inflation and as a result the cost of labor is no longer among the main investment drivers of the region.

In the forthcoming years, privatization of key assets in telecommunications, manufacturing, transport and services is expected to remain a principal factor of investment attraction in the countries, especially in the non-EU members. A general outflow is expected in the real estate market and construction, as well as in tourism and banking, since these markets have been to a large extend saturated in previous years and don't present a favorable market niche. At the same time certain other sectors, such as ICT, Energy, Infrastructure, Retail, Healthcare and Education, Agriculture and Environment are due to present opportunities in Greenfield, Brownfield and other types of investment, besides privatization.

4.1. ICT and Telecommunications

IT and Telecommunications have proven to be two rather competitive and lucrative sectors in recent years, as countries of the region have also shown considerable interest in developing necessary infrastructure and capacities in the fields. Global IT brands, such as IBM and Hewlett Packard introduced new departments to their existing offices, as they no longer aimed at retail representation of hardware and software products, but rather aimed at introduction of software and innovations development and desk management outsource as principal services.

To further boost and secure development in the IT and ICT sectors, the countries also invest in capacity building for meeting sector specific requirements and provide benign legal basis to facilitate growth in the sectors. Bulgaria ranks 43rd in WEF Competitiveness index for Laws related to ICT, followed by Croatia (54th) and Montenegro (57th). More, universities across the region offer appropriate education basis in IT and ICT studies.

Remaining infrastructure in the telecom sector, which has not yet been privatized, is expected to draw particular interest to Bosnia & Herzegovina. The telecommunications industry is expected to experience inflow of strategic investments by domestic and foreign companies due to increase in mobile internet services. These investments will come mainly in the form of reinvestments by mobile operators in the SEE countries. With the development of new services such as mobile internet and data transfer, telecom enterprises are now considering investments in infrastructure, new services (e.g., EDGE technology), etc.. For instance, Telecom Srbije (Serbia) plans to invest 20 billion dinars in 2010 and 2011 in infrastructure development and improving data transfer service. Furthermore, Norway`s Telenor and Germany`s T-com are expected to further expand their operations in the telecommunications sector of Montenegro.

4.2 Energy

Given the constantly increasing need for security of energy supplies throughout the SEE Region, the concerns of global warming due to rising emissions of CO2, and the notion that renewable energy (e.g., hydro, wind, solar, biomass and nuclear;) will be one of the primary energy sources of the future, energy companies are allocating resources in energy projects in Southeast Europe.

For example, as previously mentioned, considerable improvements are anticipated in the development of the energy sector of Albania. An idea exists for the construction of a 350 000 kW hydro-power plant on the Drin river. Additionally, there are currently no power-plants on the Vjosa river (the second largest in Albania) and, according to studies eight plants can be constructed there with a total capacity of 2030 million kWh. The implementation of these, and numerous other projects for building energy infrastructure in Albania is considered to be of momentous importance in paving the ground for a sustainable energy sector of the country - a prerequisite for outbound strategic capital from all sectors to consider the country as a sound investment location.

A few examples of major energy projects foreseen or ongoing in the region give a good overview of the overall assets and drivers that attract investors' interest. The Austrian-owned power utility EVN has laid down plans for investing in many of the SEE countries. For such, the company has planned to invest BGN 100 million in a new electricity and heating plant in Bulgaria, starting in 2010. The Czech-owned CEZ, which is one of the largest European energy companies and is operating in most of the SEE countries, has also proposed plans for building new electricity plans in Bulgaria, Serbia and Romania in the near future.

In Serbia, the Electric Power Industry of Serbia (EPS) plans to invest 9 billion EURO over the next 5 years. By 2015, the company intends to revitalize thermal and hydro power plants, as well as to invest in the mining sector and renewable energy. Further, the US-based Farmers` Ethanol, which has been active in the country for more than four years, is now initiating a new wave of investments. The company has announced plans to invest $ 135 million in the construction of an eco fuel-biodiesel plant in Smederevo - in the western part of the country.

For 2010, Petroleum Industry of Serbia plans to invest more than $370 million in modernization and expansion of its retail network. Allegedly, Petroleum Industry of Serbia is majority owned by Russia's Gazprom Neft, which bought 51% of shares for 400 million EURO under an energy accord between the two countries in late 2007. The same accord also enables Moscow to develop its South Stream natural gas pipeline (expected to deliver a third of Russia's gas supplies to Europe by 2015) through Serbia and to complete a major natural gas depot near Banatski Dvor in the Northeast of the country. In this respect, Russia is considered a major stakeholder in the region and substantial Russian investments in the energy sector of Serbia are to be expected.

As opposed to the South Stream Pipeline Project, the NABUCCO Pipeline project aims to secure Europe's energy demand with supplies from alternative sources, such as Turkmenistan, Azerbaijan and Kazakhstan, bypassing Russia. This pipeline, whose construction is estimated at 5 billion EURO, is planned to go through the territories of Turkey, Bulgaria and Romania, among others, as each of the countries will control an ownership share of approximately 17%, until new stakeholders show up.

Another headline project of considerable importance for the general development of the energy sector in the region lies within the future of the Bulgarian second nuclear plant - Belene. Construction works are currently held up, as figures do not unilaterally show sizeable advantages of putting the project forward. Although, there is a clearly outspoken interest for financing the project by the Russian State Corporation for Energy Rosatom, Bulgaria's prime minister Mr. Borisov declared, that unless a strategic European investor is found to put stakes in Belene, the project will be discontinued.

On a lower scale, several MNEs have expressed interest in investing in energy projects in Bulgaria and Romania. The UK-based company Melrose Resources PLC currently plans to invest in the development of several offshore gas fields in Bulgaria and Romania, and is supposed to start drilling in mid 2010. Also, an American company, which is still not disclosed, is considering an investment of around $300 million in Romania`s energy and industrial equipment sectors in the near future. With regards to nuclear power, several American companies - e.g., AMEC, Autodesk, Babcock and Wilcox, CH2M Hill, Froehling and Robertson, Hill International, Honeywell, Mathey Dearman, NuScale Power, Trax International and Westinghouse are interested in building nuclear power plants in Romania.

4.3. Retail chains

The retail sector will also draw investment interest, mainly due to the considerable fragmentation of the sector. The current supply-demand chain in the region is to a high degree not optimized and fragmented and implies higher transactional costs, which large entities as the above mentioned can reduce by consolidating the sector and profit from scale advantages. Expansion intentions to the region have been already announced by multinational enterprises such as IKEA, Wall-Mart and Delta MAXI.

Present in many countries throughout the world, the Swedish furniture retailer IKEA has devised long-term investment plans for the SEE Region as new markets as well as a place for producing some of its items. The company has said that it would invest 300 million euro in a shopping center that would host its first store in Croatia, and will be opened in the mid 2011. Next to that, after a cancellation of a project due to the financial crisis in the late 2009, the Swedish company is now on track with its plans for a 1 billion EURO investment plan in Serbia in the next seven to ten years. Soon enough, the company will expand in some of the other SEE countries - Bulgaria - by the end of 2010, and Albania by 2013

Serbia`s food retailer Delta Maxi plans to invest EUR 15 million in Montenegro this year (2010). The group has already opened its first largest market in Bulgaria with a 3.5 million euro investment. It plans to invest more than 80 million euro for its expansion in the Bulgarian market.

After fully acquiring Serbia`s M-Rodic in 2009 and opening 30,000 square meters of retail space , Slovenia`s largest food retailer Mercator plans to invest around than 20 million euro in Serbia in 2010 by opening more than 27,000 square meters of new retail space.

4.4. Agriculture & Environment and waste management

In so far agriculture represents a major share of countries' economies and of the rural sector, as a whole, it is expected, that it will remain interesting for investment for the coming years. One reason for that is the urgent need for restructuring and modernization of the sector, which opens a great niche for concerned stakeholders to step in at lower cost. The agricultural sector of the region is to a large extend fragmented and dominated by small, individual farms, as not all of them are market oriented. This rather uneven structure causes an unsuitable and unstable ratio of the number of farms to the total area of arable agricultural land, which leads to lower competitive advantages and lower productivity of the sector.

In this respect, agricultural policies in all of the countries of the region foresee the introduction and implementation of broad market reforms, which will eventually bring to a better balanced and effective sector. These initiatives are subject to funding and technical assistance from the EU, IFIs and national budgets and promise improved potential of the sector in the coming years.

Another anticipated sector of investment attraction will be the sector of Environment and particularly the fields of waste management and waste water treatment. Scarce statistical data available shows, that waste management capacities of the countries are insignificant and the percentage of recycled waste is close to zero. According to EUROSTAT data, for example, in 2007 Croatia reportedly collected 380 kg municipal waste per person, while 95.7 % of it was landfilled. Data for the rest of the countries, where available, shows similar findings.

Clean environment and waste treatment are priorities of the European Union Environment Policy, and as members, candidate members, or potential candidate members of the EU, all of the countries are subject to financial and technical aid from Brussels for development of the sector. More, sanctions are already being imposed on Bulgaria for not complying with EU environment policies on waste management and wastewater treatment and as a result the matter is regarded as a priority by the ruling authorities of the country.

4.5. Transport

Transport infrastructure is generally well developed in the region, as according to WEF data the countries of the Western Balkans have better transport networks in disposal, than the EU member states Bulgaria and Romania. In all countries, however, infrastructure development will be funded by both EU and IFIs, and, as was the case with the concession of the Thrace highway in Bulgaria, foreign companies are anticipated to manifest interest. Additionally, in times of crisis governments tend to announce large scale procurement notices and tenders for infrastructure development, for it is regarded to create employment and enhance economic good standing.

4.6. Automotive industry

The Automotive industry in the SEE region has also started to gain momentum and to attract investments by western companies in recent years. For instance, in 2011 Romania`s most attractive industry will be the automotive industry, with foreign investors already lining for building plants there. While at presents there are talks of opening a Fiat plant factory in Romania, the Swedish company maker SAAB assured that it will invest in a plant for spares production.

In Montenegro, the Italian sports car Lamborghini is planning the opening of a factory for electric cars. The company plans a new wave of investments in the period 2010-2013. In December 2009, another Italian car manufacturer - Fiat bought 67 % of Zastava Automobili for 200 million EURO and now has also announced plans to a build a plant in Serbia. It plans to invest another 500 million EURO by 2012 with the goal of exporting 95% of the output to western countries.

4.7. Business services

The Services sector should be also considered as an investment hotspot in coming years. Outsourcing and desk support are among the fields to have accumulated large amounts of FDI in recent years. The reasons for this are multiple, but generally the countries tend to provide favorable tax and legislation environment for this type of activities. This, accompanied by lower remuneration costs and availability of skilled bilingual workforce, is due to continue to draw investments from outbound companies, predominantly in the IT, ICT and financial intermediation sectors.

Improvements in healthcare and education are also due in all of the countries of the region. Both sectors are deemed to be very parceled and underdeveloped in recent years, which lays ground for extensive reforms in legislation, privatization, consolidation and consequent modernization of equipment in the sectors. With a market niche opening of this scale, if the countries manage to institute the legal basis for development of the sectors, investors interest is by all means to be expected.

5. Origin of investment

In the short term, enhanced interest in the strategic investment segment in Southeast Europe is expected to come mainly from EU based entities - as the EU is a principal trading partner for the countries of the region. Strategic investment incentives are also expected from Russia, as the Russian Federation and Russian companies show interest in the acquisition and development of assets in Serbia, Montenegro, Bulgaria (the case with the Belene nuclear plant) and Bosnia.

With China's ambitions for a global position in the automotive sector, strategic interest from Chinese companies is also to be expected, but perhaps at a later stage. Today China does generally prioritize acquisitions of major strategic entities on a global scale - as the recent acquisition of Volvo by the Chinese Zhejiang Geely Holding Group shows. In the years around 2014, however, when at least some of the Western Balkans countries are due to accede to the EU, a fortified interest by Chinese companies is to be expected, as they will use the Western Balkans as a manufacturing and outsourcing hub for their EU market related operations. In this respect, growth indicators of the euro zone will also play a crucial role in the attraction of Chinese investments in the Southeast Europe region.

Until then, countries like China and India are expected to mainly channel funds in portfolio investments in the region, along with European, Russian, Middle Eastern and local stakeholders, as a means of financial portfolio diversification and risk alleviation. No major projects of strategic importance and considerable scale in the region have been so far announced by companies from Asia.

5. Obstacles for the SEE countries in the near future

According to the findings of the Global Competitiveness Report 2009-2010, some of the most problematic factors for doing business in the SEE countries were: (i) widespread corruption, (ii) inefficient government bureaucracy, (iii) policy instability, (iv)obstructed access to finance, (v) inadequate supply of infrastructure and (vi) inadequately educated workforce.

For instance, corruption and insufficient government bureaucracy were among the main problems in Albania, Bosnia and Herzegovina, Croatia and Serbia. Political instability was among the most problematic factors for doing business in Albania, Bosnia and Herzegovina, Macedonia, Romania and Serbia. Certain countries, such as Albania and Kosovo, suffer considerable gaps in energy infrastructure, which may significantly exceed overall transaction costs, despite low labor cost and other competitive advantages these countries have to offer. As long as it concerns transport infrastructure, Bulgaria and Romania suffer from both lack of existing high quality roads and highways, as well as of overall decay of existing such. There is a possibility, that funds for development and modernization of infrastructure in these countries comes from the EU, however slow administrative procedures and alleged corruption practices hamper the process. The new Bulgarian government is committed to improve the utilization of EU funds, as one of the major priorities is mainly road and other transport infrastructure.

Findings from interviews with investment funds and major strategic investors, active in the region show, that the lower degree of corporate culture preparedness is also a major obstacle for the sustainability and soundness of foreign investments in the region. Common business practices, such as development of a business plan and accountancy are adopted and applied strictly by a large share of the economic entities. For another large share, however, these practices remain obscure and imply a distorting effect on competitiveness and the overall sophistication of the market environment.

Disregarding these gaps in the economic and political systems of the countries, however, a major obstacle for the general lack of interest of global investors in the region is also the small market size it has to provide. With aggregated population totaling less than 55 million people and a sensible fragmentation of national markets, the region can hardly offer considerable advantages of a scale. This is the main reason why cross-border cooperation is prioritized by all major stakeholders, including the EU, USAID and IFIs. One of the 5 five pillars of structural aid, under which EU aid is disbursed in the region, is designed precisely to facilitate and support activities in cross-border cooperation. However, although effects of these interventions are present, further steps need to be taken into account and it is mostly accepted, that economic integration of the region is not likely to be achieved before the EU accession of the countries (as member states of the EU they will be all constituents of the EU Single market. Projected dates of accession show, that these countries will become EU members no earlier than 2014.