Austria's Economic Footprint in Central Europe

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E.O. 12958: N/A
TAGS: ECON EINV ECIN ETRD AU EUN
SUBJECT: Austria's Economic Footprint in Central Europe
and the Balkans


Summary
--------------


1. Austrian commercial interests continue to benefit
greatly from intensified trade and investment relations
with the countries of Central and Eastern Europe (CEE),
as well as Southeastern European (SEE) nations. Exports
to CEE have more than doubled since 1995 and exports to
SEE have quadrupled. In 2004, more than 50% of Austrian
Foreign Direct Investment (FDI) went to the region, and
Austria was the largest foreign investor in Slovenia,
Croatia, Bulgaria, Romania and Bosnia-Herzegovina.
Austrian banks and insurance companies are particularly
dominant in CEE and SEE, with 25% and 20% market shares
respectively. Other sectors, notably financial services,
telecoms, and energy, also have active expansion
strategies in the region. Austria views its commercial
presence in the Balkans as a contributing factor to
economic growth and political stability in the region.
During its EU Presidency the first half of 2006, Austria
will promote increased contacts between the EU and Balkan
nations, as well as accession for Romania and Bulgaria in

2007. End Summary.

"Enlargement Bonus" for Austrian Economy
--------------


2. Austria's economic relations with the countries of
Central and Eastern Europe (CEE) have soared since the
opening of CEE markets in 1989. Austrian business took
advantage of opportunities in CEE at an early stage, with
Austrian banks providing the financial underpinnings for
significant export and FDI growth. Economists estimate
that new market opportunities in CEE stimulated an
additional growth rate of 3.3% in Austria from 1989 to
1997, and created approximately 60,000 new jobs. The
2004 accession of eight CEE countries to the EU
accelerated Austria's eastward focus. Austrian exporters
benefited from dynamic import growth in the new EU member
states, creating a "win-win-situation", according to the
Vienna Institute for International Economic Studies
(WIIW). With only 2% of the EU's population, Austria has
8% of EU-internal trade with the new CEE member states.
Austria's competitiveness and productivity has improved
due to the EU's eastward enlargement. Extensive economic
relations with CEE have also helped Austria to overcome
sluggish demand from traditional export markets,
especially Germany, in the Eurozone.

Impressive Trade Growth in CEE and the Balkans
-------------- -


3. Austrian exports to CEE more than doubled from $5.3
billion (10.4% of Austrian exports) in 1995 to $13.3
billion (12.3% of exports) by the end of 2004. In
Southeastern Europe (SEE),exports have more than
quadrupled from a low base of $935 million (1.9% of total
exports) in 1995 to $4.3 billion (4.0%) in 2004. In
2004, seven of Austria's 17 most important export markets
were located in CEE and SEE, headed by Hungary, the Czech
Republic, Slovenia and Poland. Equally impressive,
Austrian imports from CEE rose from $3.7 billion (6.3% of
Austrian imports) in 1995 to $11.5 billion (10.5% of
imports) in 2004. Imports from SEE increased from $370
million (0.6% of total) in 1995 to $2.0 billion (1.9%) in

2004.

Thriving Austrian FDI
--------------


4. In the past ten years, Austria's FDI has shifted
markedly towards CEE and SEE. In 2004, more than 50% of
Austria's FDI went to CEE and SEE. In 2004, Austria was
the number one foreign investor in Slovenia (30% of all
FDI flow into Slovenia),Croatia (23%),Bulgaria, Romania
and Bosnia-Herzegovina. Austria held the second position
in Serbia-Montenegro, and third in Slovakia, Hungary and
the Czech Republic. Austrian FDI to the EU-15 has
correspondingly dropped from 46% of total FDI in 1995 to
34% in 2004.

Austrian Banks and Insurance Dominant in CEE and SEE
-------------- --------------


5. Austrian banks have been active in CEE since the mid-
1980s, spearheading Austrian FDI in those countries.
Since 2000, Austrian banks have also moved aggressively
into SEE markets, considered "an extended domestic
market." Western European banking groups control some
70% of the CEE and SEE banking markets. Austrian banks
hold approximately 25% of the market, by far the largest
portion, followed by Italian banks with half that share.
In several countries in the region, Austrian banks'
market share is more than 40%.


6. Six out of Austria's seven largest banks hold huge
investments in CEE and SEE: Bank Austria Creditanstalt
(BA-CA),Erste Bank, Raiffeisen International (RI),
BAWAG, Volksbanken (VAG),and Hypo Alpe-Adria Bank
(HAAB). Among the five largest foreign banking groups in
the area, three are Austrian: (Erste Bank is number one,
BA-CA number two, and RI number four). Erste Bank
overtook BA-CA as the largest bank in the region
following its December 2005 acquisition of 62% of
Romania's largest bank, Banca Comerciala Romana, for Euro
3.75 billion.


7. Austrian insurance companies have about 60 CEE/SEE
subsidiaries. Since the low insurance density offered
high growth potential, Austrian insurance companies also
moved into these markets early. Contrary to banking
sector investment in the region, which is predominantly
M&A, the insurance industry has concentrated on
greenfield investments. Austrian insurance companies
hold a market share of 15-20% in CEE and SEE and earn 30%
of their total premiums from operations in the region.

Vienna Stock Exchange Expands in Region
--------------


8. In March 2005, an Austrian consortium, led by the
Vienna Stock Exchange (VSE),acquired a majority share in
the Budapest Stock Exchange (BSE). This was an initial
move in VSE's strategy to form a broader "Central
European Stock Exchange" alliance, including the VSE,
BSE, and stock exchanges in Warsaw, Prague, Bratislava,
Ljubljana and Sofia. The VSE's strategy complements the
expansion of Austrian banks, insurance companies and
other business into the new EU member states and other
CEE and SEE countries.

Energy, Telecommunications, and Infrastructure
--------------


9. Austrian energy and telecom providers also hold
sizable investments in CEE and SEE. The Austrian energy
provider EVN purchased two-thirds of the Bulgarian
Government's "South-East" in November 2004. The Austrian
petroleum giant OMV's purchase of 51% in the Romania
petroleum company PETROM in December 2004 for $1.8
billion was the biggest Austrian FDI ever at that time.
In July 2005 Telekom Austria took over the Bulgarian
company Mobiltel for $1.9 billion, with plans to become
the biggest telecom provider in SEE. The Austrian
Economic Chamber and the Vienna Economic Forum (VEF),a
platform promoting investments in SEE, foresee continued
investment opportunities, particularly in infrastructure.

Austrian Airlines - CEE/SEE Network Carrier
--------------


10. The Austrian Airlines (AUA) group has positioned
itself as a network carrier for CEE and SEE to support
Austrian business in the region. From its hub at the
Vienna airport (VIE),AUA currently operates 461 flights
weekly to 39 destinations in 23 CEE and SEE countries.
In January 2005, AUA obtained a 62% share in Slovak
Airlines (SA) as part of its CEE strategy. In December
2005, the Slovak Privatization Commission recommended the
sale of the Bratislava and Kosice Airports for Euro 367
million to a consortium led by VIE. VIE has further
signaled interest in obtaining shares in the Zagreb
airport, once Croatian authorities privatize it.

Opportunities.
--------------


11. There remains considerable potential for Austrian
commercial expansion in CEE and SEE. Aside from
geographical proximity and historical ties, Austrian
investors benefit from high growth prospects in the
region. There will continue to be a strong demand for
banking products. Moreover, for Austrian banks, which
suffer from high costs and relatively low interest income
in their domestic market, the CEE/SEE subsidiaries are
cash cows, with CEE/SEE profits representing a large
portion of operating income.

.and Risks
--------------


12. Eastward expansion also involves risks, including
political instability, legal uncertainties, and
corruption. Some Austrian firms and banks are becoming
increasingly dependent on growth and future developments
in these markets. The huge exposure of the Austrian
banks' CEE/SEE subsidiaries entails additional risks:
macroeconomic imbalances in the region, exchange rate
volatility, credit risks, increasingly fierce
competition, and necessary consolidation of the banking
sector in CEE/SEE. Providing banking supervision at
Western European standards remains a challenge.

Politics Follows Economics
--------------


13. Austrian banks are contributing to the
stabilization of CEE/SEE financial systems. This, in
turn, helps foster market-oriented reforms and
economic progress, as well as political stability.
GoA representatives pointed out during a recent forum
that Austria tries to define itself as a "focal point"
for business with SEE and as a mediator to stabilize
SEE politically. Close commercial ties with SEE also
explained the GoA's strong support for commencing EU
membership negotiations with Croatia. During its EU
Presidency the first half of 2006, Austria will push
for intensified contacts between the EU and the Balkan
region. Austrian Minister of Economy Martin
Bartenstein recently confirmed Austria's strong
interest in the EU accession of Romania and Bulgaria
in 2007 and in closer EU relations with SEE, "the
"European growth champion."

KILNER