External Financing and FDI in Central, Baltic and South-Eastern Europe in 2002-2003

Abstract

The paper assesses the developments in the financial accounts of the balance of payments in 15 transition countries in Central, Baltic and South-Eastern Europe. It is a follow-up of the IES working paper no. 49 of May 2004, that dealt with the state of current accounts in these countries. In contrast to the early stages of transition when the external balance was often the source of economic instability in the region and required a deep undervaluation of the exchange rate, the performance of financial accounts reflects a high degree of restructuring, progressing advance patterns of integration and stability of these economies. The composition of foreign financing has been changing in the last 5 years. The risk of indebtedness, which would be unsustainable to disburse, has been declining, even though there are still present the dangers of a financial crisis is some countries due to the fiscal indiscipline and immodest wage hikes. In the last 5 years the FDI flows have been gradually changing both their direction and composition. Both of them indicate that financial capital shortage is not any longer the primary constraint on the development of these transition countries. The tendency towards financial flows, whose pattern is typical for stabilised advanced economies and which reflects the needs of post-industrial patterns of development, is present throughout the region.