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Home » An investor’s guide to central and eastern Europe

An investor’s guide to central and eastern Europe

by Camren Potter
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Our investor’s guide to central and eastern Europe assesses which countries are leading in terms of economic development, FDI, business friendliness, quality of life and more.

The central and eastern Europe (CEE) and Commonwealth of Independent States region – consisting of Albania, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kosovo, Latvia, Lithuania, Moldova, Montenegro, North Macedonia, Poland, Romania, Russia, Serbia, Slovakia, Slovenia and Ukraine, with Turkey (also called Türkiye) added given its geographical location – experienced a surge in economic growth in the early 2000s before suffering a steep decline in 2009 in the wake of the global recession.Free Whitepaper.

The Russian financial crisis of 2014–16 saw the regional economy shrink in the mid-2010s. Collective GDP subsequently recovered, growing year on year between 2016 and 2019 before dropping again in 2020 in the fallout from Covid-19. Although regional GDP bounced back in 2021 – growing by 16.6% and exceeding pre-pandemic levels – momentum is expected to wane in 2022 due to the Russia-Ukraine war.

Russia’s invasion of Ukraine received widespread condemnation with more than 1,000 companies curtailing their operations in the country and a series of unprecedented international sanctions imposed on Russia and its ally Belarus. As such, although both countries fall within the CEE region, they have been removed from our analysis.

Turkey recorded a GDP of $853.5bn (Tl15.88trn) in 2022, making it the largest economy of the countries analysed. It also has the highest population growth with a compound annual growth rate (CAGR) of 1.2% between 2017 and 2022.

Following the 2001 Turkish financial crisis, Turkey experienced an economic boom with GDP growing at a CAGR of 9.6% between 2002 and 2016. This growth can be attributed to a range of factors including reforms introduced by then Economy Minister Kemal Derviş, a series of IMF stabilisation programmes, and a surge in foreign direct investment (FDI) following the privatisation of state-owned businesses.

Turkey is a leading manufacturer of vehicles, textiles, agricultural products, construction materials, electronics and consumer appliances. It is also an OECD and G20 member, and benefits from proximity to the EU. Turkey has been negotiating for full EU membership since 2005, although talks have been postponed since 2019.

In recent years, Turkey’s large trade deficit and high private sector debt have plunged the country into economic crisis with GDP falling year on year between 2017 and 2020. This has been made more acute by President Recep Tayyip Erdoğan’s refusal to raise interest rates to control inflation and political tensions with the US. As a result, the Turkish lira has plummeted in value while inflation has skyrocketed – hitting 73.1% in 2022, the highest of all countries analysed and the fourth highest globally behind Zimbabwe, Venezuela and Sudan.

Despite this, Turkish GDP increased in 2021 driven by Covid-related stimulus packages as well as a surge in domestic demand, exports and tourism. Despite lower tourist activity and higher commodity prices following Russia’s invasion of Ukraine, the economy expanded in 2022. It is also forecast to grow by 3% in 2023 due to a rise in household and government spending ahead of a planned election in June 2023.

Poland is the second-largest CEE economy analysed with a GDP of $716.3bn (3.42trn zlotys) in 2022. Poland’s high-income and well-diversified economy is considered one of the most resilient in the EU. The country has achieved year-on-year growth since 2017 fuelled by exports and domestic consumption.

In 2023, economic growth is forecast to slow down to 0.5% because of Russia’s ongoing war in Ukraine. Poland’s tightening labour market is also a key concern and has been further exacerbated by the country’s ageing population. However, it has been suggested that the large influx of displaced people from Ukraine could help fill these gaps in the labour supply.

Romania is the third-largest country by GDP at $299.8bn (1.49trn lei) in 2022. The country’s GDP increased year on year between 2016 and 2019, before contracting in 2020 following the onset of the Covid-19 pandemic. The economy recovered quickly, exceeding pre-pandemic levels in 2021. Romania also saw an unexpected 4.8% increase in GDP in 2022 driven by growth in inventory and its services sector.

Montenegro is the region’s smallest economy, representing 0.1% of combined CEE GDP in 2022. Its economy shrank by 15.3% in 2020 before surging by 13% in 2021 and a further 7.2% in 2022 due to an increase in private consumption and tourist activity. However, the government has been urged to introduce structural reforms to boost economic growth and employment, particularly as Montenegro’s reliance on overseas capital inflows leaves it vulnerable to external shocks.

Georgia recorded the largest increase in GDP in 2022, up by 9% compared with the previous year. This growth can be attributed to increased local demand, remittances and tourism revenue. The IMF estimates that the economy will continue to grow in 2023 with a predicted 4% increase. However, experts have also warned that monetary policies will need to be tightened to offset inflation.

Slovenia has the highest GDP per capita in the CEE region at $29,469 (€29,823) in 2022. The services sector is the most significant to the country’s economy, representing 56.5% of GDP and employing 61.7% of the total workforce. Slovenia has also experienced strong economic growth in information and communications technology, financial and commercial services, and tourism. The economy is expected to grow by 1.7% in 2023 and 3% in 2024, driven by domestic demand.

Kosovo has the lowest GDP per capita of all countries analysed at $5,230 in 2022. Since gaining independence from Serbia in 2008, Kosovo’s economy has outpaced its neighbouring countries with 2.7% GDP growth in 2022 and a forecast 3.5% increase in 2023. Although the country is still reliant on remittances and financial aid, it is moving towards more investment and export-driven growth. 

At 6.2%, Albania has the lowest inflation rate in the region. Despite being the lowest among the other CEE countries, this is still up from 2% in 2021, and reflects the rapid uptick in global market prices following Russia’s invasion of Ukraine. Inflation is expected to drop to 4.3% in 2023 and 3% in 2024. Albania is an exporter of crude oil, minerals and textiles.

The IMF predicts that Ukraine will experience a 35% decline in GDP in 2022. Ukraine was already Europe’s poorest country before Russia’s invasion in February 2022, but the war has had a catastrophic human and economic impact, leaving more than 6.4 million people displaced and 60% living below the national poverty line.

Despite this, the Ukrainian economy has shown some signs of growth. Since July 2022, the country has exported at least 7.8 million tonnes of grain through the UN-led Black Sea Grain Initiative. In September 2022, the share of companies working at more than half capacity reached approximately 80%, up from 57% in May. In addition, a government programme has helped more than 760 businesses relocate to safer parts of the country.

However, recovery is expected to be slow as the invasion continues to cause widespread suffering and destruction. The World Bank predicts that the cost of repairing the devastation would be a minimum of $349bn, a figure that is expected to grow as the war continues.

Poland was the CEE region’s leading FDI destination in 2019, 2020 and 2021. The country attracted 424 FDI projects in 2021, an 11% increase compared with the previous year and a 16% jump compared with pre-Covid-19 levels. Key sectors for investment include software and IT services, logistics and construction.

Foreign investors in Poland benefit from the country’s central location in the heart of Europe as well as its cost competitiveness, economic stability and advancing infrastructure. The Polish Investment and Trade Agency also offers a wide range of investment incentives including government grants, tax cuts and research and development funding. In addition, the country boasts 14 economic zones designed to support overseas companies and accelerate economic development.

Turkey was the second most popular investment destination in the region with 269 inward FDI projects in 2021. The country is also a leading source market for FDI, with Turkish companies investing in more than 130 overseas projects in 2021.

Turkey’s large domestic market of more than 85 million people and strategic location between Europe, the Middle East, Asia and Africa make it an attractive location for foreign companies. Invest in Turkey, the country’s investment promotion agency, also offers one of the most competitive investment incentive regimes of the emerging markets.

In early 2021, President Erdogan unveiled a new economic strategy to encourage further foreign investment in Turkey post-Covid-19. The plan included less bureaucratic red tape, more legal protection and additional financial incentives for investors.

Romania recorded 215 inward FDI projects in 2021 – the third highest of all countries analysed. After a 3% drop in project numbers between 2019 and 2020, investment levels grew by 6% in 2021.

The automotive industry accounts for an estimated 28% of the Romania’s GDP with more than 630 original equipment manufacturers producing automotive components in the country. Other key sectors include IT, aerospace and agriculture.

Estonia was the CEE region’s leading FDI destination per capita in 2021 with 27.1 projects per one million people. Key investment sectors include electronics, software and communications. The country offers a variety of grants and incentives for foreign investors including 0% corporate income tax on retained and reinvested profits.

Croatia attracted the second-highest number of FDI projects per capita with 24.1 investments per one million people in 2021. Multinationals such as IBM, Microsoft, Oracle, Coca-Cola, Teva, Siemens and Ericsson have established operations in Croatia, which offers a business-friendly environment, economical workforce and excellent quality of life.

Lithuania was the third most popular FDI location per capita with 17.5 inward FDI projects per one million people. Key industries for investment include software and IT services, business and professional services, and renewable and alternative power.

Serbia experienced a 10.3% increase in inbound FDI in 2020 despite the economic impact of Covid-19. Inward project numbers grew by a further 5% in 2021 with investments from multinationals such as Japan-based electronics giant Panasonic, Canadian automotive component manufacturer Magna International and US-based hotel company Marriot.

Slovakia had the highest share of its population using the internet in 2020 at almost 89%. In 2019, the Slovak government unveiled its 2030 Strategy for Digital Transformation of Slovakia, which emphasises using innovative technologies such as AIthe internet of things, 5G, blockchain and high-performance computing to boost economic growth.

Conversely, Bulgaria had the lowest share of internet users at 70.2%. However, measures are being taken to improve the country’s digital infrastructure. The Digital Bulgaria 2025 programme aims to modernise and increase the implementation of IT solutions across the country.

Hungary has the lowest corporation tax rate in the CEE region. The country’s 9% corporate income tax rate makes it an attractive destination for overseas manufacturers, particularly in the automotive sector. In June 2022, Hungary blocked an EU directive to impose a minimum 15% tax rate on multinationals with a revenue of more than €750m per year, claiming that the plans will hinder its investment attractiveness. The tax reform is part of a global deal achieved in 2021 by the OECD.

Corporate taxes in Montenegro vary from 9% to 15% depending on a company’s profit – businesses with profits of up to €100,000 qualify for the 9% rate.

According to GSMA’s 2021 Mobile Connectivity Index – which assesses 170 countries worldwide in terms of mobile internet connectivity – the Czech Republic is a leader within the CEE region with a score of 84.5 out of 100. The country scored particularly well within the infrastructure and consumer readiness categories.

Bosnia and Herzegovina scored the worst out of the CEE countries on the Mobile Connectivity Index with a score of 63.9. However, the country has signed an agreement with the UN Development Programme to encourage digital transformation in the country.

Foreign companies in Bosnia and Herzegovina benefit from low corporate tax levels (10%), several highly developed industrial zones and a strong banking sector. The country is also extremely open to overseas investment with virtually no FDI screening measures except for certain sectors (the defence industry, some areas of media and publishing, and electric power transmission). However, the lack of transparency about business procedures as well as a judiciary vulnerable to political influence may weaken the country’s investment attractiveness.

Estonia is the least corrupt CEE country, according to Transparency International’s Corruption Perception Index, with a score of 74 out of 100 in 2021, ranking 13th out of 180 countries and territories alongside Austria, Canada, Ireland and Iceland.

Estonia ranks seventh in the Heritage Foundation’s 2022 Index of Economic Freedom, the highest of all CEE countries. The country is extremely open to foreign investment, particularly in sectors focused on exports, innovation or that support regional development.

Ukraine is the most corrupt of the CEE countries analysed with a score of 32. It places joint 122nd with Eswatini. Ukraine is also the lowest scorer on the Index of Economic Freedom, ranking 130th out of 184 countries.

In the years following its independence, deep-rooted corruption has remained in Ukraine with widespread voter fraud as well as bribery within the police, judiciary, health service and higher education system. Political newcomer Volodymyr Zelenskyy won the April 2019 presidential election with a landside 73% of the vote after promising to tackle corruption. Zelenskyy has since introduced an anti-oligarch law, although some have doubted its efficacy.

The Czech Republic has the lowest unemployment rate across the CEE region at 2.5% in 2022. However, economists have warned that this figure could be due to a shortage of workers. According to statistics from the country’s Labour Office, there were approximately 267,000 job seekers in January 2022 but more than 364,000 job vacancies. In effect, there were only 0.7 applicants for every available job. The Czech unemployment rate is expected to drop to 2.3% in 2023.

Georgia, Bosnia and Herzegovina and North Macedonia have the highest unemployment rates in the region at 18.7%, 17.3% and 15.2%, respectively. Youth unemployment and underemployment remain key issues in North Macedonia but the labour market has shown signs of improvement in recent years. National unemployment has dropped 7.1 percentage points between 2017 and 2022 and is forecast to fall to 14.4% by 2027.

Latvia has the highest age dependency ratio – the ratio of dependants to working age population – of all countries analysed at 60.8% in 2021. This can be attributed to the country’s growing elderly population, which has been further compounded by increasing emigration to other EU member states.

Moldova has the lowest age dependency ratio with 40.5%, although this figure has been on the rise since 2015 due to the country’s shrinking and ageing population. The country’s dependency on remittances has also left it vulnerable in the fallout from Covid-19 and the cost of living crisis sparked by Russia’s invasion of Ukraine.

Slovenia had the highest life expectancy of all countries analysed in 2020 at 80.5 years.

Turkey is responsible for the most carbon emissions of all countries analysed in both nominal and indexed growth terms. It accounted for roughly one-fifth of all carbon emissions produced by the countries examined.

Turkey was also the lowest scoring of the countries analysed on the Yale Centre for Environmental Law & Policy’s 2022 Environmental Performance Index (EPI), which assesses 180 countries on their climate change performance, environmental health and ecosystem vitality. In early 2021, the Turkish government announced plans to reduce its greenhouse gas emissions by up to 21% by 2030.

Slovenia recorded the highest EPI score among the CEE countries, ranking seventh overall. Over a ten-year period, Croatia was the most improved country in the region, gaining 17.2 more points. Moldova’s performance worsened, dropping 4.8 points during the same period.

In nominal terms, Poland is the CEE region’s largest producer of renewable electricity. The country generated 28,260 gigawatt-hours of electricity in 2020, largely from wind power and bioenergy.

Estonia had the highest indexed growth in renewable electricity production between 2005 and 2020, with bioenergy, wind and solar power among the main sources.

Estonia is the only country in the world where oil shale traditionally accounts for the majority of its energy supply. In January 2021, the Estonian Reform Party, under Kaja Kallas, assumed office and set out a series of ambitious environmental goals. These included plans to phase out oil shale electricity production by 2035 and shale oil production by 2040.

Although the government asserts that it will still meet its climate targets, shale oil power plants have been restarted to replace Russian energy imports following the war in Ukraine.

Source: Invesment Monitor

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