Eastern Europe expert sees bumpy road to recovery

(Peter Elam Håkansson - East Capital)

Twenty years after the fall of the Berlin Wall triggered a cataclysm for Eastern Europe, East Capital fund manager Peter Elam Håkansson and chief economist Marcus Svedberg explained to investors this morning how the current crisis has affected the region and gave their forecast on future development.

East Capital’s founder Håkansson said that the crisis had unfairly affected Eastern Europe.

‘Last winter we saw a refinancing crisis, rather than a debt crisis. None of the Eastern European countries were especially indebted when compared with Western European levels. Indebtedness in Eastern Europe was relative low last winter and still remains like that. The problem was that too many of the loans were far too short term at the moment of a credit freeze,’ said Håkansson.

According to the Swede, the IMF-led bail-out package means that Eastern European countries are on the road towards refinancing their short-term debts and boosting their long-term capital needs.

‘As things calm down, we will see that Eastern Europe has a great potential for recovery. I think it is one of the biggest themes to play upon the next 5-10 years, and it would be sad for investors, especially those who lived the current bear market, to miss out on this opportunity. In the long term, Eastern Europe would pay off; however, people should bear in mind that it is a bumpy road, rather than a smooth straight one,’ said Håkansson.

Chief economist Svedberg explained in more detail on how the different economies in the region would recover.

‘Eastern Europe is not necessarily a homogeneous region, but rather a fragmented one. Different countries need to be treated separately and they will recover at a different pace. Those economies with lower debt levels, larger markets and fewer imbalances in the economy would recover more quickly, driven by a growing domestic consumption. I’m referring to Turkey, Poland and Russia.'

Countries benefiting from the IMF package, and which have room to lower interest rates, would also benefit, he said. 'If lowering interest rates is an important tool, then Hungary's prospects are very good indeed. Serbia and other Balkan markets are the cheapest markets overall, but they may prove too small to benefit from growth driven by local consumption. We are less optimistic about the Baltic countries, in spite of the fact that you can find extremely cheap companies there.'

‘Putting things into perspective, Eastern Europe was portrayed as a good story for more than a decade. Since the crisis, the press worldwide has shown a very dark picture, but the fundamentals for a successful story are still there,’ said Svedberg.

Håkansson said that nowadays these countries are richer and enjoy more political freedom. 'I am talking here about the real economy and common people. Take Russia, for example; which has always been our largest regional holding. People are still spending; the restaurants and shopping malls are pretty full. Of course those cities dependent in one single industry are suffering more.'

'Russia is not the same country it was 10 years ago. It now has a more robust economy and a healthy balance sheet, and is one of the richest countries in the world,’ says Håkansson.

(Jesus Segarra Sobral - Citywire - 28/08/09)