January 2019

Deutsche Bank’s Roland Wolffram reflects on how South-Eastern Europe has evolved since the social and political upheavals of the 1990s and how these changes present opportunities for financing trade

The first question we must ask is exactly which countries are we referring to when we talk about South-eastern Europe? There are several possible ways to define the region. In this article we will be discussing the following countries: Greece, Cyprus, Romania, Bulgaria, Albania and the former Yugoslav countries, i.e. Slovenia, Croatia, Serbia, Bosnia and Herzegovina, Kosovo, Montenegro and Macedonia.

What do south-eastern European countries have in common?

South-eastern Europe is a heterogeneous region with diverging historic developments. In terms of language and ethnic background, Greece and the southern part of Cyprus are largely the same. Albania and Romania (the only country in the region with a language that evolved from Latin) have their own strong roots whilst the other countries have a primarily Slavic background and have similar languages, although many of Kosovo’s inhabitants are Albanians. The region has a total population of around 65 million, including 21 million in Romania and 11 million in Greece, the region’s two largest (source: The World Factbook – Capital Intelligence Agency).

The social and political upheavals of the 1990s, which resulted from the civil war in the former Yugoslavia, have left deep marks that have still not been completely eradicated and these have influenced the countries’ security policies. Several of the region’s countries have been NATO members for some time: Romania, Greece, Bulgaria, Slovenia, Croatia, Albania and Montenegro. Bosnia and Herzegovina, the region’s most fragmented country (made up of the Federation of Bosnia and Herzegovina and the Serb Republic), and Macedonia are candidates for accession.

Most of the countries listed above are EU member states. Croatia is the most recent country to join the EU in 2013. Albania, Macedonia, Montenegro and Serbia are candidates for accession. Some of their inhabitants may hold critical views of the EU, but there is also a strong aspiration to integrate into the EU in order to participate in this huge market. Many countries are taking their time when it comes to adopting the Euro in order to maintain greater flexibility. Other than Greece and Cyprus, the only Balkan country that has adopted the Euro is Slovenia (2007). Montenegro is something of a special case. The country adopted the Deutsche Mark as its local currency in 2000, partly in preparation for separation from Serbia, which happened on the basis of an extremely close-run referendum in 2006. Montenegro later adopted the Euro.

What is the state of the economy in South-eastern Europe?

Old houses at “Mestni Trg” – the town square in Ljubljana, Slovenia (source Deutsche Bank)
Old houses at “Mestni Trg” – the town square in Ljubljana, Slovenia (source Deutsche Bank)

When it comes to foreign trade, many of these countries play only a marginal role in view of their small size and relatively low economic output. What is interesting is that of the countries listed here, Cyprus, with its strong services and finance sector, and Greece – both of which have been subject to so much criticism in the media in recent years – are clearly way ahead of the other countries, with a per-head GDP of €32,000 and €24,000 respectively, followed by Slovenia, traditionally the most prosperous part of the former Yugoslavia, at €21,000. At the other end of the scale is Kosovo, which is not recognised as a state by numerous countries, with a per-head GDP of €3,900. It also has the highest unemployment rate, at 30%, followed by Macedonia (23%) and Greece (22%) (source: The World Factbook – Capital Intelligence Agency). On the whole, however, unemployment appears to be going down in the region.

The biggest economy, with a GDP of €188bn, is Romania, which has the lowest unemployment rate at 5.3% and a low national debt-to-GDP ratio of 37% (source: The World Factbook – Capital Intelligence Agency). Romania benefits from a significant volume of raw material resources (oil, timber, coal and iron) and from a relatively strong industry and export focus.

Greece was the focus of interest for quite some time due to the serious financial and debt crisis it suffered. There are certainly still problems, as demonstrated by the ongoing credit problems experienced by local banks. There is also good news, however: rating agencies have upped their ratings for Greece in 2018 (e.g. S&P to B+, Moody’s to B3). In August 2017, Greece returned to the capital market with a five-year €3bn bond, and many of the economic indicators are developing positively.

The Agora (old market place) below the Akropolis, Athens, Greece (source: Deutsche Bank)
The Agora (old market place) below the Akropolis, Athens, Greece (source: Deutsche Bank)

From 2010 onwards, Greece received three bailout packages from the EU, the ECB and the IMF; the last of these amounting to US$96bn ran out in August 2018. Nevertheless, Greece still has to fulfil a range of obligations linked to the programmes, and it remains to be seen how the government headed by Alexis Tsipras will do in the next parliamentary elections. Many Greeks do not agree with the government’s essentially unavoidable austerity drive, and the financial situation of many Greeks is indeed extremely difficult, which also encourages tax evasion. It is also striking how foreign investment remains low.

Tourism plays an important role in many countries, especially Croatia, Greece, Cyprus, Bulgaria and Montenegro, although increasingly also in countries such as Albania and Slovenia. Security concerns in other traditional holiday destination countries are boosting this trend.

Hedging risks: How stable is the banking sector in South-eastern Europe, and what is the best way to protect exports to these countries?

The Greek banking landscape has been cleaned up considerably over the last few years and is now extremely transparent, with only four systemic banks. These institutions are still suffering from an extremely high quota of non-performing loans totalling approximately 48%, and they are reducing their international networks in neighbouring countries. In Cyprus, the percentage of non-performing-loans is slightly lower (40%) (source: Bank of Greece and Central Bank of Cyprus, respectively). In the past few years, the supranational European Bank for Reconstruction and Development, founded in 1991 after the fall of the communist regimes in Eastern Europe to support this region, has also started to cover the foreign business of Greek and Cypriot banks, which has made it easier for these institutions to conduct their letters of credit and guarantee business with their correspondent banks. All in all, it can be said that the number of letters of credit issued by Greek and Cypriot banks has gone down significantly in both countries since the beginning of the crises, and that this business, which is by now considerably reduced in any case, is very much conducted on the basis of down and advance payments. However, with the support of everyone involved, the trade has always remained active.

Other than that, the banking landscape in South-eastern Europe is characterised by the prominent role played by Western banking groups, especially from Italy and Austria. The transfer of capital and expertise has been intensive for many years, and the non-performing loans are usually within the bounds of the acceptable and appear to have gone down significantly in recent years. During the time of the upheavals in the former communist countries, German banks were busy positioning themselves in the former East Germany after German reunification, and are therefore less well represented in South-eastern Europe. Deutsche Bank is nevertheless intensively involved in the trade finance business with South-eastern Europe, which we conduct with our correspondent banks in the region and which enables us to offer our clients suitable solutions and risk protection. Germany, Italy and Austria are important trading partners for almost all of the countries in South-eastern Europe, and we can offer support here via our branches and subsidiaries. Time and again, Deutsche Bank’s strong presence in Asia has proved to be an asset when it comes to trading transactions between South-eastern Europe and Asia, whose countries are extremely export-focused.

In some countries, there are still gaps in the companies’ foreign trade hedging instrument expertise. In Albania, for example, the letter of credit instrument is very rarely used because companies are not familiar enough with it and shy away from the extensive paperwork involved. Albanian banks even hold seminars for their clients on the topic. Bosnia also uses the LC system only rarely and works increasingly with guarantees, even using these to hedge single transactions for which a letter of credit would actually be much more suitable.

What should companies looking to enter the market in South-eastern Europe take into account, and how will the region develop?

Much has improved in the past few years, but there is still a lot to do. Some of these countries are very small and find it difficult to participate in international business. The key here is to find niches and to establish productive companies. The situation calls for increased foreign investment and support for infrastructure projects. This in turn demands more legal certainty and corruption-reduction measures, two aspects that are already being addressed successfully in many places. The latest economic growth, unemployment and company credit rating trends are also encouraging. More effort must be made when it comes to tax fairness. For example, Montenegro’s finance minister recently stated that the grey economy’s share in the country’s total economic output amounted to more than 30%.

With its current problems and conflicting opinions, the EU will certainly not only be seen as a saviour in South-eastern Europe; however, it is still clear that all of these countries would ultimately like to be safely ensconced under its umbrella. The political landscape in South-eastern Europe continues to be fragmented and almost all countries are experiencing recurring problems with governments and leading politicians, for example Romania and Macedonia. Countries such as Bosnia and Herzegovina, Kosovo and Cyprus, whose northern part is governed by Turkey, continue to be conflict-ridden. On the other hand, it is hopeful that the dispute surrounding Macedonia’s name has now finally been resolved and that the country will be called North Macedonia in future, which is not least likely to make the accession to the EU and NATO easier.

As mentioned at the beginning, together, the countries examined here form a very heterogeneous region. We should continue to observe these countries with interest as potential business partners. They are certainly in need of trade and financing, and even if this region is slightly less in the focus than major booming sales markets, it actually deserves our attention – it is an important part of Europe and we will all benefit from a flourishing and peaceful South-eastern Europe.

Roland Wolffram is Director of Trade Finance, Financial Institutions, at Deutsche Bank responsible for Italy, Greece, Cyprus, Malta and Israel

This article was first published in German by Export Manager, issue 10, 12 December 2018. A copy can be viewed here

Roland Wolffram

Director of Trade Finance, Financial Institutions | Deutsche Bank

Roland Wolffram

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