Maturing markets lift robust region

South-East European markets have soared since five countries shrugged off state control – Romania’s currency is the strongest in Europe – making the region attractive to investors.

The markets of South-East Europe (Romania, Bulgaria, Serbia, Ukraine and Moldova) represent a combined population of 87m. GDP per head in this region ranges from €740 (£552) in Moldova to €4,501 in Romania. This provides ample scope for convergence, with GDP growth over the past seven years substantially outpacing the eurozone.

The pattern shows signs of similarity across all of these markets and, after many years of economic contraction and subsequently sluggish growth, they seem finally to have overcome the transition from state command to market economies.

The macroeconomic outlook appears more robust than ever, and less correlated with developments in America, with most exports heading to the European Union (EU). Gone are the days of hyperinflation – Romania and Bulgaria’s Consumer Price Index was down at 6.6% and 7.3% respectively in 2006.

The attractive nature of the markets, along with large-scale privatisation, has triggered and is still attracting strong flows of foreign direct investment (FDI).

The involvement of Western banks, vying for market share, is providing cheaper consumer credit and mortgages and therefore fuelling consumer spending.

The number of consumer loans taken out in Romania in 2006 increased by 111% on the previous year. This trend has benefited companies such as Top Factoring, a fast-growing receivables collection business.

Romania and Bulgaria joined the EU in 2007, marking a milestone for both countries. Accession saw the union earmark in the region of €32 billion, to be spent in the period to 2013 on mainly infrastructure projects. At the same time, new regulations are resulting in increasing transparency and the implementation of Western standards.

Romania has possibly the most diversified economy in South-East Europe, with prospering businesses in aerospace, the automotive sector, pharmaceuticals, and industries founded on the country’s rich pool of natural resources, including oil.

Unemployment has come down to 5.2%, its lowest figure since 1990, leading to labour shortages in many regions. Most key industries are entirely privatised and certain sectors, such as utilities, are witnessing a higher degree of liberalisation than most Western economies.

Although more recently the leu has lost ground against the euro, Romania’s national currency has appreciated by 18% since the end of 2003, making it Europe’s strongest currency.

The Bulgarian leva has been pegged to the euro since 1999, the key sectors here being agriculture, property and tourism. Both countries have a relatively young and well-educated population.

It can be argued that Serbia is about four to five years behind its two more illustrious neighbours in certain ways, and is yet to have its run. The transition to a market economy has not yet fully occurred, although the government coalition – following the stagnation of the 1990s and a period of international isolation – has implemented a series of radical structural reforms.

This has stabilised the economy, with Serbia rated top global reformer by the World Bank in 2006. As a result, inflation was brought down from 71% in 2000 to about 7% in 2007, with the local currency appreciating slightly against the euro in recent years, fuelled by strong domestic demand and FDI.

About 1,700 companies – most of which are highly illiquid – have been privatised via a listing on the Belgrade stock market. Some of these companies are able to tap the booming Russian market as a result of a free trade agreement between the two countries – the only free trade agreement in place between Russia and an East European country (excluding the former Soviet republics).

Attractive companies in the region include Policolor, South-East Europe’s leading paints and coatings producer; Albalact, Romania’s leading independent dairy; Romar, a provider of occupational health services and Top Factoring, a company mentioned earlier. These are businesses in sectors that have matured in the West, but which are only now emerging in the South-East Europe region.

Other sectors that are providing investment opportunities include logistics and storage, construction, milling, bakeries and retail, real estate, beverages, construction materials and human resources.

Growth opportunities in the region and the robust macroeconomic outlook make South-East Europe a compelling investment prospect.

“These markets have overcome the transition from state command to market economies”

MORITZ FRIED A director of New Europe Capital