In 2009 Eastern Europe suffered the sharpest decline in FDI inflows of any emerging-market region. After reaching a record total of US$183bn in 2008, FDI flows into the region plummeted to US$97bn in 2009. In no year since 1994 had FDI to the region declined before, neither in 1998-99 nor in the global slump of 2001-03. FDI flows to the region were flat in 2010. Although they recovered modestly in 2011, to an estimated US$125bn, another significant decline is estimated for 2012. FDI inflows are unlikely to return to former levels for some time. Eastern Europe will be less attractive to investors than faster-growing emerging markets, such as those in Asia and even in Latin America.
First-half 2012 data is available for 20 countries in the region. For these countries FDI inflows in January-June 2012 were 27% down on the same period in 2011—far higher than the 8% drop in global FDI inflows in this period, and a much sharper drop than in any other emerging market region (in Latin America and Africa FDI inflows actually increased over this period). There was considerable variation in country performance across the region. In the first half of 2012 13 of the 20 countries recorded year-on-year declines in FDI, while seven saw increases.
Almost all subregions were affected. The sharpest year-on-year decline (by 56%, from US$2.7bn to US$1.2bn) was in the three Baltic economies. Inflows into East-Central Europe declined by 21%, from US$13.4bn to US$10.5bn. FDI inflows to the Balkans were flat because of a large year-on-year increase in flows to Bulgaria, while inflows declined in each of the other seven states in the subregion. FDI flows to the eight EU member states from the region are expected to be a mere US$25bn in 2012, lower by US$10bn than in 2010 and far below record totals from a few years ago, belying the once prevalent view that EU membership stimulates FDI inflows.
Investor confidence has been hit
Weak growth has hit investor confidence. This is the main reason for the decline in FDI. Growth has weakened as the euro zone, the region's most important market and source of investment, has sunk into recession. Several countries in Eastern Europe have also tipped into recession. The recession in the euro zone is acting as a brake on economic activity in Eastern Europe, through weaker trade, investment and financing through the banking channel. Exports and industrial output in Eastern Europe have weakened and business and consumer sentiment remains fragile. In addition to faltering external demand and the weak outlook for credit, domestic demand remains generally anaemic. Fiscal consolidation is under way in much of the region.
The drop in FDI flows occurred despite some recent improvement in the quality of business environments. According to the World Bank's latest Doing Business report, as in some previous years, several east European countries feature prominently in the list of top reformers, based on changes in regulations over the past year. Five east European economies were among the ten economies improving the most across three or more categories. As in some recent years, in the past year eastern Europe had the largest share of economies registering improvements, with 88% of economies implementing at least one institutional or regulatory reform making it easier to do business, and 67% implementing at least two.
Poland and Russia record sharp drops
There was a considerable drop in FDI flows in the first half in the two main recipient countries—Russia and Poland. This offset significant increases (often from low levels) in some other countries during this period (Slovakia, Bulgaria, Ukraine and in particular Hungary). Although Poland has avoided the recession that has afflicted most of its neighbours, FDI inflows into Poland were actually negative in January-June 2012, compared with inflows of US$9.5bn in the first half of 2011. FDI flows into Russia in the first half of 2012 were 39% lower than in the year-earlier period. FDI flows into Russia slipped to US$16.3bn, significantly down from US$26.8bn in January-June 2011. Base effects account for a large part of this drop. There were several large transactions in January-June 2011—for example, PepsiCo completed its US$5.4bn buy-out of Wimm-Bill-Dann, in one of the largest ever foreign acquisitions of a Russian company.