External financing in Central and Eastern European countries after the global financial crisis

Ewa Bilewicz

doi:10.33119/jmfs.2019.38.1

Abstract

The aim of the paper is to analyse changes in the financial account of the balance of payments in 11 Central and Eastern European countries (CEE) during the years 2007-2017. The analysis comprises changes in the value of the financial account's components. The economic crisis reversed existing tendencies in net capital flows to CEE countries. They transformed from net recipients of capital to providers of capital to the rest of the world. This situation is completely different than the pre-crisis period when CEE countries experienced significant net inflows of mainly direct invest- ment, with capital moving ‘downhill', mostly from richer EU countries. The fall in the surplus on the financial account of the balance of payments was determined mainly by a large drop in net other investments and even their outflow, especially during 2012-2015. The net outflow of capital was also caused by the accumulation of reserves by central banks. In relation to other transactions of the financial account, a slowdown in net capital inflows was recorded. The lowered surplus on the CEE countries' financial balances can have an effect on their external stability, however, they have seen a reemergence of inflows in recent quarters, including in non-FDI flows.

Highlights

The benefits associated with net foreign capital flows are widely reported in the economic literature
From the conducted research it arises that after the crisis Central and Eastern European countries experienced a significant change in the direction of capital flow in the financial account of the balance of payments
After a period of substantial influx of net foreign capital lasting since the beginning of the century, a majority of the countries in the region have registered a decrease and an outflow of net foreign capital

Summary

Introduction

The benefits associated with net foreign capital flows are widely reported in the economic literature. Other advantages of foreign capital include technology transfer that accompanies foreign direct investment and the increased efficiency of the financial market, which should contribute to faster economic growth For these reasons, many countries decided to introduce liberalization and deregulation of financial markets, based on the assumption that without rigid regulations the capital market functions effectively and has a positive impact on the economy. The analysis accounts for changes in the balances of the main components of the financial account, i.e. direct, portfolio and other investments as well as reserve assets (the balance of investments into derivative instruments was not taken into account due to the lack of data) It enabled defining the volume of net capital inflow/outflow within the scope of individual types of foreign investments. As arises from the data presented, before the crisis all of the CEE countries experienced a net foreign capital inflow (the financial account balance was negative). Since 2012 most of the analysed countries of the region have recorded a net foreign investment outflow

Czech Republic

Summary

Findings

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