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Eastern Europe: Private Investment Steady Despite Asian Economic Crisis

Washington, 27 March 1998 (RFE/RL) -- Long-term private resource flows into Central and Eastern Europe last year rose 11% over 1996, reaching an estimated $51 billion in 1997, according to the World Bank.

In an annual report on Global Development Finance released this week, the bank says most of the increase in net private capital flows into the region went to Russia.

Net capital flows from official creditors such as the International Monetary Fund (IMF) and the World Bank, declined 18% to $9 billion, continuing a long trend of shifting from official to private sources for borrowing and investment capital.

The net private flows includes bank lending, foreign direct and equity investment as well as portfolio investment. The bank's report says net lending via the sale of bonds made the biggest increase, rising 55% to almost $10 billion in 1997.

Russia was the largest seller of bonds in the region in 1997, increasing issuance sixfold. Poland was next by raising the amount of bonds it sold by fourfold. The bank says the region's increased access to international markets was marked by debuts into the bond markets by Russian cities, such as Moscow and St. Petersburg, and increased participation by private corporations.

Most importantly, says the bank, the nations of Central and Eastern Europe and Central Asia did not seem to have their access to global capital markets "much impaired" by the Asian financial crisis.

Total equity investment flows into the region in 1997 stayed about the same as the previous year, at about $24 billion. Net foreign direct investment in the region totaled about $16 billion, with Poland the largest recipient of $4.5 billion. It was followed by Russia and Turkey with just under $3 billion each, and Hungary with $2 billion, largely due to the privatization of Matav telecommunications.

Portfolio equity flows into the region totaled $9 billion in 1997, but it was marked by "considerable volatility" over the year, especially during the October Asian turmoil.

Stock markets across the region suffered "significant declines" in the wake of the Asian financial crisis, which spread to many parts of the world. The World Bank report says this caused interest rates in several countries, most especially Russia, to rise sharply.

The year had started much higher for the stock markets in these countries, the bank noted. Russia's stock market shot up 129% in the first half of the year and Turkey's went up 65%.

But as the Asian financial crisis began to send ripples around the world, stock markets in Russia, Poland and Turkey fell significantly. Much of that was recovered by the end of the year, the bank report said, but it indicated that several countries "likely experienced outflows of portfolio equity toward the end of the year."

The bank noted that despite this turmoil, bond issues and loan commitments to the region continued at about the same pace as in 1996. GDP (gross domestic product) growth rose from 0.2 % in 1996 to 2.3% in 1997, as 17 of the region's 25 economies achieved positive growth rates. Russia's grew 0.4%, the first rise since the start of its transition, the bank's report said.

World Bank Chief Economist Joseph Stiglitz says 1997 shows "not just the opportunities, but also the risks of international capital flows." A sudden withdrawal of foreign capital from East Asia was a part of the cause of the financial crisis, he says, but also showed it has "worldwide ramifications" that "remind us of the risks that private capital poses for all countries," he said.

The report says that a combination of wary investors and uncertain prospects for recovery in East Asia is likely to reduce net long-term private capital flows to all developing countries in 1998. However, it adds, if the East Asian crisis is bottoming out, then this decline will be "tempered by the continued robust health of the global economy" and investors returning to markets in countries with strong economic fundamentals.