Eastern Europe

by | Feb 13, 2003 | Archives

Today we continue a series of economic updates which shows why holding Eastern European currencies is one of the favourite investments now.

The article below was provided by Thomas Fischer at Jyske Bank:

"The world's largest trading bloc, the EU, is currently preparing itself for the admission of 10 new members:  
Poland, the Czech Republic, Hungary, Slovakia, Slovenia, Estonia, Latvia, Lithuania, Malta and Cyprus.
"For the second time in ten years, Denmark has had a pivotal role in the enlargement process. In June 1993, the so-called Copenhagen criteria were determined, specifying the European Commission¥s economic, political and legal requirements of candidate countries. These include having functioning market economies capable of withstanding competitive pressures and market forces within the EU, having stable political institutions guaranteeing democracy and the rule of law, and complying with the acquis communautaire  the body of laws and norms adopted by EU members."Satisfaction of the above criteria paved the way for their admission into the EU as negotiated at the recent Copenhagen Summit in December 2002, under the chairmanship of Mr. Anders Fogh Rasmussen, the Prime Minister of Denmark."Once referendums have taken place in all of the candidate countries and the Accession Treaty is signed at the Athens Summit in March 2003, the candidate countries will most likely become members on 1st May 2004. As new members, the accession countries will not initially be allowed to adopt the Euro currency, but will have to join the Exchange Rate Mechanism II for a minimum period of two years, until the degree of stability necessary for them to join the single currency has been attained. This is most likely to occur first in 2007."This particular round of enlargement, the fifth since the inception of the EU, is historic for several reasons. Firstly, with ten new members, the round constitutes far and away the largest single accession."Secondly, it will be the first time that countries of the former Soviet bloc (8 of the 10 were previously planned economies) will be members of the world¥s largest trading bloc."Thirdly, it is the first enlargement since Spain and Portugal¥s accession in 1986, where the new members¥ GDP per capita levels are lower than that of the incumbent counterparts. In this case, the levels are both historically and significantly lower."Enlargement will provide a further boost to the European economy.  On the one hand, existing EU members will be able to benefit from cheaper factors of production and access to an expanded market of an additional 65 million consumers. On the other hand, new members will be able to benefit from the free movement of capital, goods and services within the EU, which, among other things, will greatly enhance the efficiency of their production capacity."The process of convergence will continue to facilitate the economic and political conditions which will promote enhanced economic growth, strengthen exchange rates and attract further inflows of both speculative capital and FDI. This process will continue to have a significant effect on investment opportunities in the region."For example, in the 2 candidate countries with the largest economies  Poland and Hungary, there currently exist several opportunities for earning relatively high yields and investing in strong currencies. Having almost 40 million inhabitants and an area of over 310,000 km2, Poland is regarded as the key country in this round of enlargement. As such, the Polish negotiators were successful in attracting over half of the Ä40.8 billion enlargement budget allocated to the ten candidates. The principal amount of these transferred funds will be allocated to reforming Poland¥s agricultural sector, which accounts for approximately 40% of employment (yet only 5% of GDP), offering significant potential for productivity improvements and economic growth."Poland¥s economy has developed rapidly since the Copenhagen Summit in 1993, with annual growth rates of 6% for the first 5 years, dropping slightly thereafter to around 4-5% per annum, which is expected to continue for the coming years. Since 1997, FDI inflows have totalled around USD 45 billion, whilst GDP per capita has risen throughout the same period by around 40%. Inflation is currently running at less than 1%."Hungary has exhibited strong economic growth throughout the convergence process. Over 85% of the economy is now in private hands, with widespread foreign ownership of Hungarian firms. Indeed, over 80% of the FDI into the Central and Eastern European transition economies has flown into Hungary. Hungary¥s Sovereign debt was upgraded in 2000 to investment grade."Data on the currencies:"The early weeks of 2003 saw high volatility in the emerging markets. Particularly the East European currencies were in focus throughout January, see-sawing wildly, which resulted in poor liquidity. Will this state of affairs continue, or was it just a single swallow that heralds no summer?"Poland"The Polish zloty suddenly lost its footing - various rumours about closure of Polish assets by investors and the fact that the Polish government bought other currencies against the zloty in an attempt to reduce the country's foreign debt, plus the depreciation of Hungarian forint made the zloty lose momentum. The Polish government has disproved the rumour about intervention, but announced its intention of buying other currencies against PLN in future to reduce the debt. I believe that the weakening of PLN from 400 to 425 against EURO and from 378 to 390 against the US dollar is mainly due to the uncertainty surrounding HUF, and that we shall see PLN gradually strengthen, and I recommend investors to buy the Polish Zloty at the present level."Hungary"The darling of the markets, the Hungarian forint, went through a rough patch in January. After selling forints, the Hungarian central bank suddenly had to buy back its currency! After a few interest-rate cuts and direct intervention, market participants suddenly lost their nerve and sold Forints at a furious pace. Volatility rose, and the market turned very jittery. The EURO/HUF rate rose from 234.00 to 253.00 and then plunged to 242.00 again. The USD/HUF rose from 222.00 - 235.25 and is currently trading at around 225.00 It is estimated that the National Bank of Hungary bought EURO to the tune of about 5 billion, which shows what kind of money is available in the market at present. The NBH has no desire to hold these EURO amounts - last week the NBH announced three auctions aimed at selling its EURO at the highest bid. So far, it is deemed to have sold about EUR 1 billion."The market will remain jittery. As long as the NBH is flitting between an inflation target and a foreign-currency policy, the market will be in doubt about the next step that the NBH may take. No doubt this will cause wider fluctuations in the near future. However, the interest rate is still relatively high and I still recommend investors to buy Hungarian Forint."Jyske Bank (www.jbpb.com), the second largest Danish bank, offers the opportunity for clients to take advantage of investment opportunities in the emerging markets of Central and Eastern Europe, such as Poland and Hungary.  Clients of Jyske Bank can deposit money in relatively high interest yielding accounts denominated in several emerging market currencies."Additionally, clients have the opportunity to buy/sell any tradable bond or stock from the region, indeed, throughout the whole world."Furthermore, Jyske Bank offers several bond and stock mutual funds specializing in emerging markets, for example, the JI Euro Emerging Markets Bond Fund, which has provided a return of over 8% per annum since its establishment in 2000. Further information can be obtained from Mr. Thomas Fischer, Head of International Client Relations at Jyske Bank Private Banking, 
+45 8989 6230 or fischer@jyskebank.dk."

+45 8989 6230 or fischer@jyskebank.dk."

Much of Eastern Europe is well established on its path to democratic capitalism and many of these countries now offer greater opportunity than the western nations they have followed. Don't miss considering them as an option for your investing. The high return generated by Eastern European currencies creates interesting multi-currency sandwich possibilities. As you can borrow yen for as little as 1.5% or US dollars for just over 3% and invest these loans in high yielding zloty or florint investments.

We'll delve into these ideas at great depth in July when Thomas Fischer is with us at Merrily Farms and don't forget the possibility of joining me and the entire Jyske staff in Copenhagen this August!

Until next message, Good investing.