European convergence continues to be the long-term attraction for investing in Central European coun...
European convergence continues to be the long-term attraction for investing in Central European countries. Despite increasing signs that disagreements over agricultural subsidies and political problems within the EU may stall the accession of some Central European countries into the EU scheduled for 1 January 2004.
A recent Reuters survey among financial market participants showed a significant decline in market expectations of EU membership of the 10 Central European and Baltic countries by 1 January 2004 ' although most continued to ascribe a 50% or higher probability of it happening for the more advanced Central European countries, including Poland, Hungary and the Czech Republic.
While delays in EU membership are a concern, it should not dampen enthusiasm for Central European countries. Asset price is a function more of economic and structural policies than of EU membership per se.
Therefore, entry delays due to disagreements and political problems will slow but not stop the convergence process.
For instance, embedded in the European Commission's suggested financial package for new members is a 10-year transition period for direct agricultural subsidies to the accession countries; this was given a hostile reception by Central European countries, particularly Poland. In the end, this issue will be overcome, but in the short-term investors' attention should remain focused on domestic reforms.
The Polish government recently disclosed plans to pay off government debt to the private second-pillar pension funds. This should be beneficial for equities with funds increasing their allocation.
The situation in Russia also confirms that asset price convergence is more a function of economic and structural reforms than of EU membership.
Russia's membership is a long way off, yet budget and market reforms implemented by President Putin are driving economic growth.
Reform momentum began in May 2001 and continued through the rest of last year and into 2002. It has strengthened the country's economic structure and bolstered economic prospects and policy flexibility.
Although the oil sector was an important trigger for current growth, the economy's strong performance in 2000-2001 would have been impossible without important underlying institutional and structural changes. Increased optimism regarding Russia led to S&P upgrading Russia's sovereign credit rating outlook from stable to positive last month.
Elsewhere in the EMEA region, the environment is far less positive. There appears to be little sign of a resolution to the current conflict in Israel.
Domestic demand is likely to remain weak in the coming quarter, fuelled by low consumer and investment demand.
After a good bounce in the Turkish market in the last quarter of 2001, it is increasingly unlikely that this good performance will continue. It is anticipated that the Central Bank will cut rates further, reflecting the continued sluggish growth environment. The bank last cut rates by 200 basis points to 57% on 20 February.
Increased optimism regarding Russia.
Disagreements over agricultural subsidies.
Further allocation of funds to Poland.
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