EUROPE - Foreign direct investment (FDI) has rebounded in Central and Eastern Europe (CEE), according to a report by Erste Bank.

The 'Foreign capital returning to CEE' report found that FDI has increased by about 9% year-on-year since the crisis.

The Czech Republic's inflows have reached more than twice the levels recorded in 2010 - almost 4% of GDP - while the negative trend has been reversed in Hungary, where FDI reached about 2% of GDP.

FDI also picked up in Slovakia, reaching 1% of GDP. In the Ukraine, FDI remained at high levels, close to 4% of GDP, which actually covers the whole current account deficit and significantly reduces its external borrowing needs.

In CEE, the Czech Republic, Slovakia, Poland and Croatia - unlike countries in the southern euro area, such as Greece and Portugal - managed to stand on their own feet throughout the crisis without severe tensions in external financing, according to the report.

Some countries had to undergo an economic rebalancing - Hungary, Romania and Ukraine - and adopt corrective measures, including structural reforms.

Coordinated IMF and EU assistance has also lowered the pressure on their external financing and helped them implement measures to narrow imbalances.

Juraj Kotian, co-head of CEE macro research at Erste Group, said: "The next question is: how long will it take for rating agencies to align ratings to fundamentals? Or will ratings become partially ignored by markets as too rigid and outdated?

"We notice that the latter is already happening. The A+ rated Slovak government pays a lower risk premium compared with the multi-notch AA rated Spain or slightly better rated Italy (AA-).

"Croatia (BBB-) and Hungary (BBB-), which are both at the low end of the investment grade, and Romania (BB+), which was during the crisis downgraded to junk category, borrow more cheaply than Portugal, which is - even after recent multi-notch downgrades - still rated higher then them."
 
Since the fourth quarter of 2009, there has been a rebound of portfolio investments, particularly into the Czech Republic and Poland.

The vast majority of portfolio investment inflows went into debt instruments, mainly government bonds.

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