FT SPECIAL REPORT Investing in Central & Eastern Europe Friday November 9 2012 www.ft.com/reports | twitter.com/ftreports Inside » Region draws Beijing targets European shift China out to woo new EU members strength from Page 2 Auto factories in top gear prudence New models and low labour costs boost production Outlook is brighter for the area but there is still Page 3 a difficult year ahead, writes Neil Buckley Football fortunes Euro 2012 provided he outlook for central and to do whatever it takes to keep the a spur to overhaul eastern Europe (CEE) still eurozone together. hinges on developments and Investors have drawn reassurance infrastructure in decisions beyond its borders from the European Central Bank’s Poland and Ukraine – in the eurozone periphery, September declaration that it was Tand the big capitals of western ready to engage in unlimited buying Page 3 Europe. But hopes are growing that of sovereign bonds, and progress the period of greatest risk may have towards a eurozone banking union. passed. “It is pretty clear that the EU has cally.” Mr Quijano-Evans suggests a investors have been taking a Membership matters: Shale gas Six months ago a Greek exit from recognised it can’t afford simply to growing belief that the euro can sur- more differentiated view and giving investors drew the euro, dealing a huge blow to CEE give up,” says Simon Quijano-Evans, vive could set off a virtuous circle. credit to CEE countries for putting reassurance from advance slows countries, and endangering the single head of Emea research at ING. “The Improving news could make consum- their fiscal houses in order much ear- ECB’s declaration it Recent restrictions currency’s survival, looked distinctly most supportive thing for CEE coun- ers more willing to spend – encourag- lier than eurozone periphery coun- would buy unlimited possible. tries is to have a clear message that ing companies to invest some of tries – in some cases through sovereign bonds AFP hinder development But that danger has receded as the there is still something for them to their record cash holdings. That sce- super-tough austerity programmes. Page 4 EU has shown signs of being prepared converge on, politically and economi- nario remains some way off. But Continued on Page 4 Sturdy banks sector is well cushioned Financial services Indicators are good although the picture is differentiated between countries, says Jan Cienski As western Europe descends into its second slump in four years, many central European banks – Part of Austria’s Volksbank is now in Russian hands Getty largely owned by eurozone- based parents – look well braced for any external 2 per cent,” says Zbigniew seek to intervene in $2.8bn shock. This is particularly Jagiello, chief executive of of local government debts. true of banks in the north- state-controlled PKO Bank Romania has been ern part of the region. Polski, Poland’s largest plagued by three years of Over the past couple of bank. austerity, with falls in real years central and eastern “That means payments for wages, leaving problem European banking sectors financial services will fall, loans rising and credit have shown strong profits, and banks with a small growth sluggish. gradually declining levels of share of the market will Beyond the EU, Ukrain- problem loans and steadily have trouble demonstrating ian banks are showing rising deposits. adequate returns on capital.” signs of stability after a As a result, loan-to-deposit Although Polish banks bruising crisis in 2009 when ratios across the region did dabble in foreign cur- non-performing loans leapt have decreased, reducing rency mortgages, as did to more than 50 per cent. the need for external sup- their counterparts in Hun- Banks had to be bailed out port, which historically has gary, Romania and the Bal- by parents, and billions in been important in countries tic countries, new forex loans have been written off. where foreign ownership mortgages have now almost Many foreign banks ranges from two-thirds of completely disappeared. pulled out of Ukraine, leav- the banking system to more Existing ones are largely ing the field clear for big than 90 per cent. being repaid because Polish Russian rivals, which have That has largely saved banks were more stringent also been playing a larger local economies from credit in their lending procedures role in Belarus, targeted by crunches, as there are signs than banks elsewhere in the EU and US sanctions that parent banks are grad- region. Forex loans have because of its authoritarian ually decreasing funding. never been a problem in government. Fitch, the rating agency, Slovakia and the Czech Russia’s Sberbank has says foreign-owned banks Republic. moved into central Europe, decreased their funding by buying the international about 20 per cent between operations of Austria’s the end of 2008 and mid-2011 Volksbank. The Russians to €62bn. Loan-to-deposit are also thought to be eye- Sturdier central and east- ratios across the ing a midsized acquisition ern European banks are in Poland, although Sber- likely to be tested as parent region have fallen, bank’s arrival would create banks face growing troubles political shockwaves. in their home countries, reducing the need Consolidation has contin- and economies across cen- for external support ued in Poland, where tral Europe slow, as with Spain’s Santander has Poland and Slovakia, or fall added to its Bank Zachodni into recession, as is happen- The situation looks more WBK (bought in 2011 from ing in the Czech Republic. troubling in Hungary, Allied Irish Banks) by tak- Most countries now see Romania and Bulgaria, ing over KBC’s Kredyt loan growth decelerating, however. “Poland and the Bank to create Poland’s and profits are expected to Czech Republic have third-largest banking group. decline this year and next. increased their resilience to Further sales are thought “Generally, 2013 looks a an external shock, while to be unlikely as western little more pessimistic than the vulnerabilities in Hun- European banks grapple 2012 just about everywhere gary and south-eastern with a crisis at home and in the region,” says Artur Europe have increased,” lack the cash to buy. Szeski, financial institu- says Gunter Deuber, chief What risk there is for the tions director at Fitch in central and eastern Europe region is external, possibly Warsaw. analyst at Austria’s Raif- in the form of shocks to While the overall indica- feisen Bank International. parent banks and subse- tors for central and eastern “While Russia is close to quent liquidity withdrawals European banks are fairly overheating in the retail – something regulators in good, the picture is growing segment and Ukraine is the region are keeping a more differentiated between stagnant, there is nothing close eye on. countries. Poland, the Czech like a regional trend.” Governments, particular- Republic and Slovakia have Hungary’s nationalist ly in countries with surplus by far the most solid banks government has already liquidity such as the Czech – the Czechs and Slovaks given western banks a Republic, are also worried even have fewer loans than nasty shock, when it about the impact of a possi- deposits – that have no pushed through a forex ble eurozone banking trouble meeting demanding repayment scheme last year union. They fear such a capital requirements. that saw banks shoulder union could allow banks to “The prospect for the more of the costs of such drain capital from stronger next six quarters or so is mortgages. Now, there are countries to prop up opera- economic growth of about fears the government may tions in weaker ones. 2 ★ FINANCIAL TIMES FRIDAY NOVEMBER 9 2012 Investing in Central & Eastern Europe Region puts its faith in foreign partnerships Outsourcing Top companies prepare to share the spoils of new-found economic success, says Kester Eddy When BP moved to set up a business service centre in central Europe in 2009, the UK-based energy company surveyed half a dozen coun- tries, before plumping for Skills set: Budapest has seen a surge in investment Dreamstime Hungary. “When we create a serv- ice centre, we’re not prima- But the torrent of new and especially Poland rily about cost savings, but arrivals has stalled since attracting large numbers of about creating value,” elections in 2010 heralded foreign-owned service cen- Philip Whelan, BP’s head of the arrival of prime minis- tres in the past decade. European business service ter Viktor Orban. His right- Anna Wojt, consulting Talking business: Wen Jiabao, the outgoing Chinese premier, and Bronislaw Komorowski, Poland’s president, at the Belweder Palace in Warsaw Reuters centres, told a business wing Fidesz government manager with PwC, the pro- seminar in Budapest last quickly set about imple- fessional services firm, esti- month. menting unorthodox eco- mates the sector will boast “For us, it’s all about the nomic policies which, 100,000 jobs in Poland by capability of the people, the though ostensibly designed the end of next year, helped skill sets on the market, the to rein in the budget deficit, in particular by growth in Beijing targets European shift security of the industry, the were disruptive and widely provincial cities. economy and infrastruc- seen as favouring domestic “The SSC-BPO sector is ture, it’s about government businesses. continuously growing in support.” “Unfortunately, there is a Poland, with both resident He admits that the com- negative perception of Hun- companies expanding and petition was stiff. “Lots of gary,” says Mark Bownas, new entrants coming in. China Wooing EU’s new member states may prove wise investment, writes Neil Buckley other countries are very partner with KPMG in For example, this year new good at this – Krakow, Budapest responsible for arrivals include Shell and where BP has also estab- outsourcing advisory across Heineken in Krakow, Dolby hinese investment in cen- western Europe and its direct access saw with Berlin, a flagship project for lished a service centre, is a the region.