The Untapped Potential of South Eastern Europe
We have seen emerging markets in Central and Eastern Europe opening up and developing quite quickly. Some of them have done so through their ascension to the European Union and others by organising their legislation in accordance with European standards, opening up borders, having foreign investors come in, as well as putting in place free trade agreements and investment incentives.
Of course, transitional economies traditionally have a lot to offer to foreign investors. Some of the benefits include less competition and less mature and saturated markets. Usually, these are consumer markets in need of products and services that are not there yet. Or that are just too sparsely available and at unsuitable levels of sophistication.
The countries of South Eastern Europe, with their singular economic infrastructure, and with a number of state-owned companies ready to be privatised, remain highly attractive for foreign investments tired of more mature European markets.
Foreign investors in the countries of this region have the possibility of owning a 100% interest in a company, options of employing foreign citizens and open bank accounts in domestic and foreign currencies. This, along with and estimated regional GDP growth of 3% per annum until 2020, and positive forecasts and rankings in the Doing Business reports, encourage further investments in Western Balkan countries.
For local companies, this means turning towards new markets that are outside of their countries. It is an incentive for local manufacturers, service providers or financial institutions to go beyond their home markets. On the other hand, foreign investors and investments create new jobs, raise the standard of living and the purchasing power of the population, as well as increase the competitiveness of local players.
However, there is a certain transitional period, during which the rules are not yet firmly established. For example, when the local legislation is not harmonised with EU laws. There is also a vacuum in terms of institutions – especially courts – that are not able to apply the same standards or the same expertise or professionalism than in other countries such as for instance those in the EU are in a position to offer.
A Learning Curve in doing Business
When it comes to transitional economies, the local way of doing business is usually different to the established way in more mature markets. However, it is a learning process on both ends. Locally, you have to get used to different standards and methods, as well as different compliance rules. This was a problem in Ukraine, for instance: how to deal with the Western, standardised compliance rules that were previously unknown off in that country.
There is also a learning curve for investors. Obviously, they have to do a lot of research about a country before investing or entering a new market. Getting accepted by local communities is something for which one cannot prepare easily – surprises might happen. But, in the end, it is beneficial for both ends.
The Southeast European markets hold a lot of appeal, from a global perspective. They are quite diverse, but all are opportune. The Slovenian market is more adapted to Western standards, since Slovenia has been a member of the European Union for a number of years now. The country has very close ties to other Western economies. Traditionally, there is a lot of interaction with a number of its surrounding countries – Austria, Italy and Hungary to a certain extent.
On the other hand, Serbia is still seen as standing aside in relation to the European market. Smaller markets such as Bosnia Herzegovina, Macedonia or Montenegro are very much untapped markets with fast development potential.
The Balkans draw investors from around the world, especially from the EU, Turkey, Russia and China. On their part, the countries of that region further foster a friendly environment for foreign investors through tax reforms and various incentives.
A Foothold into Europe
One of the more appealing characteristics of South Eastern Europe, especially when compared to Central and Eastern Europe, is that it is still very much untapped. Looking at the events in the past 20 years, we can definitely see the same pattern being duplicated in South Eastern Europe. Particularly in markets such as Serbia, Macedonia, Montenegro and Bosnia and Herzegovina. These are markets that offer huge opportunities and that still have a number of regulations a bit weaker, or more flexible than in the EU.
For instance, Macedonia is 10th on the World Bank''''s Doing Business List. The GDP is expected to exceed 3.3% in 2018, due to higher domestic demand, and public and foreign investments. And, Macedonia''''s "One-Stop-Shop" system enables investors to register their businesses four hours after the application submission – ranking it number four globally in the Starting Business category.
With a 15% income tax, Serbia has one of the most favourable corporate income taxes in the wider region. The country signed free trade agreements to markets counting 1.1 billion people – the EU, Customs Union (Russia, Kazakhstan, and Belorussia), Turkey, CEFTA, and others. I see Serbia as a good gateway for Chinese and other overseas investments into the rest of Europe. For example, the 10 billion euro-worth "Belt and Road" infrastructure project in one of such initiatives that will greatly improve communications and increase Chinese presence in Europe and Asia.
Clearly, the existing historic relations and numerous trade agreements set the stage for positive opportunities. In a certain sense, through these markets, despite some of them not being a part of the EU yet, one can definitely get a firm foothold into the rest of Europe.
The opinions expressed in this article are the author''''s own and do not reflect the view of any other partner of or any other person associated with Karanovic & Nikolic. This document is not, and should not be regarded as investment or legal advice or as a recommendation regarding any particular course of action.
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