Raiffeisen Research: SEE Keeps Feeding Europes Economic Growth

23. Oktober 2006, 00:00

SEE countries are expected to be the motor of Europes economic growth as average real GDP growth rate in the region...

SEE countries are expected to be the motor of Europes economic growth as average real GDP growth rate in the region will hover in the six-per-cent range, Raiffeisen Research, the research outfit of RZB Group, wrote in its latest regional report. The paper was presented at a conference on Southeastern Europe.

Among other growth engines will be the entry of Bulgaria and Romania to the EU on January 1 next year and the expected changes to the Central European Free Trade Agreement (CEFTA).

The research unit notes SEE countries continue to enjoy EU member states as its main trading partners. Total SEE-EU trade exchange last year stood at EUR 79 million, a significant 53-per-cent increase compared to 2001. The positive dynamics has been triggered mainly by the signing of bilateral Free Trade Agreements.

Furthermore, internal trade saw SEE countries exchange goods worth EUR 3.5 billion, up from EUR 2.6 billion reported in 2002. For instance, Croatia increased its trade with its regional neighbours by 27 per cent, while Bosnia and Herzegovina boosted its regional trade by 63 per cent.

The trend will be propped up by pending positive changes to CEFTA Agreement. Among those is the introduction of uniform bilateral trade incentives, which will span all existing 31 bilateral free trade agreements. The move is expected to liberalise more than 90 per cent of trade in the region, including almost all trade in industrial products.

At present, volume of trade between SEE countries is running below its potential because of political conflicts and wars over the past decade. Yet outstanding issues are expected to be solved shortly and the biggest evidence to this end is the expected CEFTA expansion.

The current members of CEFTA, namely Bulgaria, Croatia, Romania and Macedonia, will most probably be joined by Albania, Bosnia and Herzegovina, Serbia, Montenegro, Kosovo and Moldova. Yet, Bulgaria and Romania will be prompted to leave once they become full-fledged members of the EU.

Thus by year-end, the "new CEFTA" will cover an area with a population of just above 55 million or around 12 per cent of the EUs population. The latest data suggest that the GDP of the new CEFTA members amounts to more than EUR 200 billion, representing around 1.8 per cent of the current GDP of the EU.

Strong economic activity is generating pressures on import growth, not only due to high household consumption but also as a result of the recent strong investment cycle in the SEE region.

Still most of the countries are running high trade deficits as they are still unable to fully unveil their export potential. They have largely been responsible for the often too high current account gaps. Most governments in the region rely on FDI to cover these gaps.

Over the last couple of years, strong growth in FDI was seen in the region, especially in Romania and Bulgaria. The foreign investors increased interest came as a result of the EU perspective for the region, lower average labour costs than in the new Member States, proximity to the EU market, robust economic growth and ongoing reforms.

The privatisation process in SEE countries contributed positively to the increase of FDI inflows. In the coming years, privatisation receipts should remain high, since a still significant proportion of assets is in government hands in SEE countries.

Liberalisation in the transportation and communication sector, utility services and privatisation of financial institutions might continue to generate strong flows of foreign capital to the region. Most of the SEE countries have recently adopted proactive investment promotion policies, offering various incentives, as they realize the importance of FDI for economic growth.

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