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Economic growth in Southeast Europe
(SEE) is picking up but remains
below the region’s potential. What
can be done to accelerate the pace
of economic activity?
One of the biggest issues the region is struggling
with right now is that structural reforms
have not moved as fast as we have expected
or hoped for. As a result, SEE countries are
saddled with relatively high unemployment
and poorly functioning labour markets and,
consequently, the levels of growth across the
region are not reaching full potential and are
not high enough to address those kinds of
fundamental challenges. Ultimately, if I were
to identify what the top priorities for governments
in the region should be, it is to take
care of much-needed structural reforms and
alongside that also focus on areas of competitive
advantages that their countries may
have. And then thirdly, I would say, is to look
at how to help unlock the financing potential
in the region, how do you incentivize banks to
lend more actively. That touches the subject
of non-performing loans (NPLs), the subject
of deleveraging of Western banks which are
present in the region and, to some extent,
also the subject of the need for greater development
of capital markets in the region.
What role do you see for the international
financial institutions (IFIs) in
this process?
The slow growth and the other macro-economic
challenges in the region are nothing
new. They started to emerge after 2008. On
that backdrop, the IFIs, including the IFC, decided
to engage actively together in designing
an action plan. There was the first round
of the action plan in 2008 and another round
in 2012 when we realized that growth is not
coming back to the region. As part of this
action plan, the IFIs have put quite a bit of
funding in both the public and private sector
in the region to help stimulate at least the
financing part of the whole equation. Going
forward, high on the agenda of the IFIs is how
to channel funding to support the development
of local capital markets.
Governments, IFIs should
jointly seek to unlock
financing potential in SEE
region
There is also a need for the IFIs to engage
on NPLs, which have been weighing heavily
on the region’s banking sector, to the extent
that we can find ways to help banks reduce
that burden and allow them to lend more to
productive enterprises. On competitiveness,
what the IFIs can do is try to find companies
which are ‘winners’, companies that have a
good pool of skills, or a competitive advantage
in terms of technology or location. For
example, we have worked with some agribusiness
companies in the region on how to
improve their supply chains. The IFIs can also
help create sustainable access to infrastructure
in the region.
When it comes to structural reforms, this is
an area that is difficult for a group like IFC
to engage in directly as we tend to invest in
individual projects, individual transactions.
This is something where we expect the International
Monetary Fund (IMF) and the World
Bank to take the lead role and I know that is
a priority for them. However, IFC does have a
joint advisory practice with the World Bank
proper where we are working with governments
on trade and competitiveness issues
that have significant bearing on efforts to
improve regulations and create opportunities
for business to flourish.
Private sector growth in SEE
should be supported by public
measures
What external risks do you see facing
economic development in the region
over the near to medium term?
The region is fairly well integrated into Europe
so the pace of growth in the eurozone
is important. That is one of the key risks as
growth in Europe has not been great. Another
eurozone-related impact is the events
unfolding in Greece. That relates both to the
extensive footprint of Greek banks in some
parts of the region but also Greece is an export
destination for SEE countries.
The fiscal limitations faced by the SEE governments
are also a major concern as there is
not enough fiscal room to stimulate growth
through public spending. So the growth will
ultimately have to come from the private
sector. Although we are keen to see that happen,
if governments are unable to support
private sector growth through public measures
– be it through public-private partnerships
or any other types of structures – that
may take some steam off the infrastructure
investment.
The other potential risk for growth in the region
is Russia, although the scale of the potential
impact varies from country to country,
as Russia is an important export destination
for some of the SEE countries.
What can be done to reverse the
decline in capital inflows to the region?
The issue here for me is boosting competitiveness:
how do you make yourself attractive
vis-à-vis all the other places around the world
which are trying to attract investors? When
it comes to global companies, they need to
see what is the competitive advantage of a
specific country – is it its future membership
in the EU, is it its domestic market potential,
is it a platform to export somewhere else.
The priority for these various countries is
how to identify the winning sectors in your
own economy, how to attract international
companies. Serbia has done some interesting
things trying to reach out to the Middle
East for investors. Capital will start to flow
into the region once there is a clear percep-
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