Investment slowdown fears for central Europe

By Jan Cienski in Warsaw and Thomas Escritt in Budapest

Published: May 12 2009 03:04 | Last updated: May 12 2009 03:04

Central Europe has been hard hit by the global economic downturn, but the pain has not yet persuaded many investors to close recently built factories that have sprung up across the region in the past decade.

The reason is that factories tend to be more modern than their counterparts in western Europe and central European labour – helped by recent declines in local currencies – is still significantly cheaper than in more developed parts of the continent.
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However, investment agencies are reporting new investment is likely to slow significantly this year and there are fears over the region’s status as an investment hub.

Companies have been rethinking or putting off future commitments, part of a wider trend of slowing foreign investment in a region that had until recently been one of the world’s leading investment magnets thanks to its close ties to western Europe and lower costs.

Poland, which saw €12bn ($16bn, £11bn) in foreign direct investments last year, expects that there will be only about €7bn this year. In Poland, Marcegaglia, the Italian steel maker, was thinking about building a new rolling plant near the city of Szczecin, but has decided to hold off, concentrating on other priorities.

“Poland is still a very attractive country for us because of its large market and lower costs,” said Antonio Marcegaglia, the company’s chief executive. “The investment in Szczecin is not completely out, but we needed more time to look and decide if we want to go ahead in the future.”

Central Europe could also benefit as international companies struggle to cut costs, which could help partially shield the region from steep recession.

In one recent example Dell, the computer maker, announced it was shifting production from its factory in Limerick to its plant in Lodz. Rafal Branowski, the company’s spokesman, said that the reason for the move was purely to save money. Dorota Lombardi, a director of the special investment zone near the central Polish city of Lodz, said none of the companies that had set up factories in her region had pulled out, but several potential investors had put off talks until later this year.

“We are seeing interest from companies who already have investments with us. Those who are new are more hesitant,” she said, adding that it made little sense for investors to close new factories. Some companies are pulling out: Hitachi, the Japanese electronics company, is closing a new flat-screen television factory in the Czech Republic because of a slump in demand.

Central Europe could benefit as international companies struggle to cut costs, which could help partially shield the region from the steep recession expected in western Europe.

Sorin Vasilescu, director of Romania's Agency for Foreign Investment, said: “A few projects have been cancelled – and their number is not significant, but more than a few are on standby.”

Mr Vasilescu said he expected to find out the fate of these postponed investments in the second half of this year.