Business Sentiment For Central & Eastern Europe Cools, But Remains Positive Overall

Latest Results from the Thomson Reuters & OeKB Central & Eastern Europe (CEE) Business Climate Index

* Investors more cautious, but still optimistic and keen to expand in CEE
* Flourishing business climate in Russia, ahead of Bulgaria and Poland
* New investments remain strong, particularly in Energy and Water Supply sector
* Positive indications for Serbia, but further economic slowdown in Hungary
* Mixed financial sector expectations, as banks prosper and insurers curb expansion plans

Vienna (Austria) – Investors remain satisfied with the current business situation of their local business operations across Central & Eastern Europe (CEE), however they were more reserved about expectations for further business development than in the Spring, according to the 400 international companies participating in the sixth quarterly survey for the Thomson Reuters & OeKB CEE Business Climate Index in July 2008. Although the climate has become somewhat overcast it remains positive overall and 40% of participants expect the outlook for their local business units to improve over the next six months.

In July (before the crisis in South Ossetia), the best business climate was to be found in Russia, where the existing high level of optimism continued to improve. Investors are highly satisfied with the current performance of local business operations and confident about the future. This is reflected in the positive investment strategies: 56% of Russian-based business units are set to be expanded over the next twelve months, with none of the survey participants planning to withdraw capital. Russia is also one of the top countries targeted for development projects, just behind Ukraine. However, the extent to which recent events (e.g. the crisis in South Ossetia) will affect the business climate remains to be seen.

Approximately a third of respondents will be pumping fresh capital into CEE over the next twelve months. In many countries, including Russia, Bulgaria, Croatia and Ukraine, businesses look even more set to expand than they did in the Spring. The energy & water supply industries are especially keen to expand their local operations. Investments are planned in almost half of local business operations, while almost 70% of all the companies surveyed in this sector will be investing in new locations within the CEE region.

For the first time since the survey began in January 2007, the balance of expectations in relation to the economic development in Hungary is negative. [Fig 5] Although the majority of investors still view the economic outlook as stable, 26% of those surveyed expect it to deteriorate over the next twelve months. Only 21% expect to see improved macroeconomic performance, a clear indication of a further economic slowdown in Hungary. In particular, the financial services sector in Hungary is quite pessimistic.

However, investors have a very different view of the economic development in Serbia, where expectations are far more positive than in the Spring. Recent political events in Serbia have had a stabilising and confidence-building effect, as the formation of a government by pro-Western parties is seen as an important step towards closer relations with the EU.

Although banks and insurance companies report flourishing businesses in CEE, their future expectations vary considerably. Whereas banks are optimistic, insurance companies have significantly reduced their business expectations. In April, 56% of insurance companies expected their business performance to improve, but this figure has fallen to 33% in the current survey. Accordingly, the insurance sector is reserved about its investment plans: 85% of companies are not planning to expand existing business units over the next twelve months.

Commenting on the survey, Thomson Reuters spokesman, Detlef Glow, Head of Central & Eastern European Research at Lipper, said: “The CEE business climate index was lower this quarter, but still in positive territory. With the exception of direct investment, which stands level with the previous survey, all other components of the index were down. Business climates in Russia, Bulgaria and Poland were the best at the time of the survey. However, following the recent Georgian conflict, the drawdown in business expectations and climate might become worse in the third quarter.”