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South-East Europe drives growth in the New Europe

Stefan Bruckbauer, Deputy Head of the Economics Department at Bank Austria Creditanstalt (BA-CA), thinks that this year and in the coming year, South-East Europe will remain the most dynamic region in Europe. BA-CA expects economic growth to reach 5 per cent in 2005 and 5.5 per cent in 2006.

This positive development has also enhanced the region's overall economic attraction. With over EUR 8 billion in foreign direct investment (FDI) in 2004, South-East Europe accounted for one-third of total FDI attracted by countries in Central and Eastern Europe. According to BA-CA, the environment for direct investment in the region will remain favourable in the coming years.

Low wage levels and tax rates as well as further EU integration will make significant contributions to this development. BA-CA's economists expect foreign direct investment in South-East Europe to reach some EUR 10 billion annually in 2005 and 2006, including the forthcoming privatisation projects.

South-East Europe will thus account for almost 40 per cent of total inflows of FDI in Central and Eastern Europe. This will make it possible to finance a large part of the growth-driven current account deficit of 8.5 per cent in the region. About one-half of the strong economic growth is supported by investments, which means that part of the FDI-financed current account deficit may be seen as an input for future export success.

In the past four years, South-East Europe has substantially increased its market share in the "old" EU-15 countries, from 1.5 per cent in 2000 to 2.3 per cent in 2004. According to BA-CA's economists, the countries in South-East Europe, especially the EU candidate countries, will be able to further improve their position in the EU markets in the coming years.

Bank Austria Creditanstalt estimates that, if the candidate countries reach the same level of integration in the medium term as the new member states which joined the EU in 2004, and if the other countries in South-East Europe reach at least half of this level, the market share in the old EU-15 countries could rise to about 8 per cent in the medium term. As a result, the volume of exports to the EU-15 could more than double, with the total amount of the region's exports rising to a level exceeding the current figure by EUR 60 billion.

"In the coming years, South-East Europe will remain Europe's powerhouse, even if some countries continue to experience political difficulties slowing down their integration process," says BA-CA's economist Stefan Bruckbauer. "For some countries in the region, there is still potential for negative political surprises. At the same time, integration in some countries could make surprisingly fast progress. For example, Bulgaria could catch up with one or the other NMS8 country in the introduction of the euro," Stefan Bruckbauer adds.

These developments are giving impetus to the banking market, which achieved exceptionally strong loan growth of 29 per cent annually in the past four years. For the coming years there is still considerable potential, even if central banks may be expected to take more restrictive measures in response to the strong growth, which has led to current account problems.

BA-CA expects lending volume to grow by some 300 per cent in the next 10 years; new loans would thus total just under EUR 130 billion. This means that banking business in South-East Europe will grow more strongly than in the NMS8, which are also expected to continue to experience substantial growth of about 230 per cent.

Bank Austria Creditanstalt (BA-CA) recognised the considerable potential of countries in Central and Eastern Europe and in South-East Europe at an early stage. In 1975 the bank opened a representative office in Hungary, becoming the first Western bank to gain a foothold in CEE. Since the early 1990s BA-CA has steadily enlarged its network. "We are still benefiting from our first-mover advantage. Today the region is our core market," says Regina Prehofer, the BA-CA Managing Board member responsible for operations in Central and Eastern Europe.

Since BA-CA started to expand in Central and Eastern Europe, the bank has achieved steady growth. In the past year BA-CA acquired Hebros Bank in Bulgaria and Eksimbanka in Serbia, thus bringing the number of branches of its network in the region to a total of over 1,000. The number of customers rose to 4.6 million. The combined net income before taxes generated by the banking subsidiaries in CEE increased from EUR 321 million (2003) to EUR 486 million (2004). In the first quarter of 2005, the CEE banking subsidiaries of BA-CA improved their net income before taxes by 50.7 per cent compared with the same period of the previous year.

This strong performance was an important factor driving the price of BA-CA shares. Since trading in BA-CA shares started on 9 July 2003, the share price has risen by about 155 per cent. "This makes the BA-CA share the most successful European bank share in this period," says Regina Prehofer.

In line with the strong performance of BA-CA shares, Bank Austria Creditanstalt's market capitalisation has doubled over the past five years, from EUR 5.76 billion in March 2000 to almost EUR 11 billion in April 2005. This means that BA-CA is ahead of Erste Bank (about EUR 9 billion) and Raiffeisen (about EUR 6 billion).

"BA-CA is a success story which we will continue. We will further expand our network in the region," says BA-CA Managing Board member Regina Prehofer. In 2005, the focus of business development is on Serbia and Bulgaria, where Eksimbanka and Hebros Bank, the two banks acquired in the past year, are being integrated into BA-CA's local banking subsidiaries.

The branch network in Poland and Hungary will be further expanded by opening new offices (Poland: +56, Hungary: +20). In Romania, BA-CA signed a pre-agreement to merge its local subsidiary HVB Bank Romania with Banca Tiriac. “This will make our market position jump to 7.5 per cent and bring us close to our target of 10 per cent,” says Regina Prehofer. With combined total assets of about EUR 2.1 billion and 72 branches, the merged bank will be the number 4 on the Romanian banking market.

Bank Austria Creditanstalt is Austria's largest bank. Its network in Central and Eastern Europe comprises more than 1,000 offices in eleven countries. Together with HVB Group, the network covers 16 countries. The BA-CA / HVB Group operates the leading international banking network in the region

Source InvestRomania