* FDI to east Europe may take several years to pick up
* Russia, Poland, Turkey seen best positioned to attract FDI
* Post-crisis times to bring greater differentiation
By Krisztina Than
BUDAPEST, Hungary, Oct 22 (Reuters) - The foreign direct
investment that once washed over eastern Europe has slowed to a
trickle and countries wanting to return to near pre-crisis
growth levels must pursue deep reforms to coax it back.
The collapse in western demand since the start of the crisis
has halted almost two decades of industrial expansion in the
European Union's east, with FDI inflows plummeting as much as 50
percent versus a year ago.
Now Hungary, Slovakia, the Czech Republic, and other states
must claw their way out of contractions of 5 percent or more
without a crucial motor and expect a long slog with high
unemployment and slower convergence with the richer West.
The region's medium-term prospects hinge once again on
attracting FDI and those countries could receive the highest
inflows which pursue tax reforms, improve the business
environment, cut red tape and make their labour markets more
flexible, Neil Shearing at Capital Economics said.
"Attracting foreign direct investment will become
increasingly important, with countries that are successful in
progressing structural reforms most likely to become
destinations of choice," Shearing said.
DIFFERENTIATION, REFORMS
Once the crisis ends, the most attractive investment
destinations will be those countries that manage to maintain a
cheap labour force, attractive tax levels and pursue reforms.
That will lead to a differentiation that could create haves
and have-nots.
"As a manufacturing base Central Europe is simply too cheap
to not attract FDI over a multi-year horizon," said Gillian
Edgeworth, economist at Deutsche Bank.
"But I doubt that it returns to the levels that we have seen
in the past while there could well be more differentiation
across countries."
Countries mostly reliant on real estate investment like
Bulgaria and Romania could suffer most after spending most of
the last decade not pursuing as many industrial investors as
their more manufacturing and export-heavy peers.
And those with large privatization programmes are in a
better position to attract funds.
"This puts Russia, Poland and Turkey in a good position. All
three countries also offer sizeable domestic markets, access to
other consumer markets and relatively large labour forces as
incentives for investors," said Zsolt Papp, economist at KBC in
London.
A rare big FDI project in the region this year is a new car
plant in Hungary which Daimler AG <DAIGn.DE> is building in
Kecskemet, a town about 80 kms east of Budapest, at a cost of
800 million euros which will employ 2,500 workers from 2012.
Kecskemet could secure the Daimler investment due to its
traditionally good relations with German investors and measures
such as a cut in the local tax which firms pay on their turnover
that might give it a leg up over other possible locations.
"Despite the crisis we have seen development rather than an
exit of investors," Kecskemet Mayor Gabor Zombor told Reuters.
But, once a darling of investors, Hungary has lagged in FDI
in recent years largely due to its high taxes, and received 3.4
billion euros in FDI last year in the form of equity investment
and reinvested profits, central bank data show.
In the first half of 2009 this figure was a negative 500
million euros as profit repatriations seasonally jumped in the
second quarter on dividends and fresh inflows barely trickled.
"Hungary and the CEE region could switch to a new economic
model in the coming years in the form of more reliance on
domestic savings," Gyorgy Barcza at K&H Bank said.
Poland, which avoided recession largely due to its large
consumer market of 38 million, posted FDI inflows of about 3.65
billion euros in the first half of 2009, compared with total FDI
of about 11 billion euros in 2008.
Slovakia, which attracted huge flows of FDI in the past
decade benefiting from its low-cost workforce and 19 percent tax
rates, saw FDI plummet in the first quarter. []
In the Czech Republic FDI is expected at around half of 2008
levels of slightly over 20 billion crowns. []
An investment by Hyundai Motor Co <005380.KS> in a car
factory in 2006 was the last high-profile manufacturing project.
"The outlook of inflow of new FDI is not so optimistic
because the Czech Republic is no longer a cheap country," said
David Marek, chief economist at Patria Finance. "The Czech crown
is strengthening every year and wages are growing."
FUTURE UNCLEAR
After the fall of communism, FDI flooded the region's
rapidly growing new markets by way of privatisations and a push
by governments to lure foreign car and electronics makers.
That ended at the start of this year. Inflows to South-East
Europe and the Commonwealth of Independent States (CIS) plunged
by 47 percent in the first quarter from a year earlier,
according to UNCTAD, the U.N. trade and development agency.
Analysts said companies had cut back on capital spending and
reinvesting profits due to a fall in orders.
"FDI (to the CEE region) could take 2-3 years to recover to
pre-crisis levels," said Papp at KBC.
"Given that most industries are operating well below normal
capacity utilization levels now, there is no need to increase
capital spending in the next 1-2 years."
FDI flows result in higher overall investment, production
and exports and force higher competitiveness of domestic firms
while also playing a key role in financing current account gaps.
Current account deficits have narrowed sharply on improving
trade balances this year, reducing external financing pressures,
but are seen widening again once demand and imports pick up,
even though the gaps will likely not reach pre-crisis levels.
That means FDI flows will continue to be important as a
source of non-debt generating financing.
(Additional reporting from Prague, Bratislava and Warsaw)
(Reporting by Krisztina Than; Editing by Victoria Main)
