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Credit Ratings and Their Effects on Foreign Direct Investments in Balkan and Black Sea Region

In this article, the effect of sovereign ratings of countries located in Balkan and Black Sea Region on their performances of FDIs is analyzed. In order to reach a result, only Fitch’s ratings were taken due to lack of data collected from S&P and Moody’s for the time period starting from 1990, when Union of Soviet Socialist Republics (USSR) collapsed, until 2013.
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  Credit Ratings and Their Effects on Foreign Direct Investments in Balkan and Black Sea  Region by Berkol Alevli Balkan and Black Sea Region which could be assumed as new “New Africa” of the world in terms of attracting recent investments has survived from life-long war and tragedies even in the late 20 th  century. The region has been recently sparkling with the economic reforms, industrial developments and social improvements; it is possible to see now world-wide brands moving their production lines to the region, for instance, during the crisis in Greece, they managed to attract crucial foreign direct investments (FDIs) into the country. FDIs have been always an important push-up for the economies, particularly emerging economies, and boosted macro-economic indicators of nations by decreasing unemployment rate, increasing the GDP and so on. There are a number of indicators that are able to have an influence on FDIs and credit ratings are one of those. Credit rating agencies (CRAs) which are Standard and Poor  ’s (S&P), Moody’s and Fitch, evaluate the country’s performance in terms of economy, which is the main subject of the article. Credit notes (assumed as sovereign ratings) give the first signal to an investor to draw a brief outlook of the country. CRAs apply distinguished methods and update the notes when a current view of the country is affected by internal or external changes such as political or economic issues. In this article, the effect of sovereign ratings of countries located in Balkan and Black Sea Region on their performances of FDIs is analyzed. In order to reach a result, only Fitch’s ratings were taken due to lack of data collected from S&P and Moody’s  for the time period starting from 1990, when Union of Soviet Socialist Republics (USSR) collapsed, until 2013. To summarize the table below, Russia comes first in the region by attracting more than 50  billion $ net FDIs, Turkey and Ukraine follow Russia with 12.5 and 7.8 billion $, respectively. Greece, striving to survive from the deep crisis, has the lowest credit note after Ukraine by B-, according to Fitch. Here, countries having the investment grade from Fitch which is BBB- as minimum, differ significantly. In this article, 9 countries in the region have been analyzed and 6 of them got the investment grade which ensures foreign investors to invest in the country. Recently, only 4 of them have higher than “investment grade” level, according to Fitch. With the shift of European Union (EU) after joining, Greece was the first country to reach the investment grade level but their FDIs were not affected significantly until 2004. On the other hand, Croatia, the newest member of EU succeeded to have BBB- from Fitch in 1997 and attracted foreign investors since then. Even though Turkey was the last one among these 6  countries, with the rapid improvements of the economy in the last 10 years, Fitch has awarded Turkey with BBB- in 2013. At the right side of the table, it is possible to see doing business rankings which were given by World Bank annually. Doing Business ranking implies how easy to start up an enterprise in the country; 189 economies were evaluated in 2013 and among these 9 countries in the region, only Georgia has been shining with its business reforms and took place in top 10 last year but the country yet has not taken adequate note by any of CRAs. The last column in the table is CDS, which shows credit risk in the country (the lower, better). Because of high political tension in Ukraine, CDS numbers rose sharply and this situation also threatens foreign investors. Bulgaria, Russia and Romania are doing quite well according to Deutsche Bank Research on 18 th  of February. Country FDIs (million $) Credit Rating Investment Grade (First Received) Doing Business Ranking CDS Russia 51.416,11 BBB 2004 92 184 Turkey 12.555,00 BBB- 2013 69 243 Ukraine 7.833,00 CCC - 112 1162 Greece 2.868,38 B- 1995 72 - Bulgaria 2.046,47 BBB- 2004 58 124 Romania 2.024,00 BBB- 2004 73 186 Croatia 1.274,90 BB+ 1997 89 336 Georgia 788,24 BB- - 8 - Serbia 355,29 B+ - 93 - Croatia, recently joined the EU, got the investment grade in 2001 with BBB- by Fitch. It is not possible to say that there was a significant increase from that year until 2006 but with the help of becoming a candidate member for EU in 2005 with Turkey, investments into the country have rapidly increased. Due to the global crisis, the investments fell down to less than 1 billion $ and Fitch downgraded its note for Croatia in 2013 by BB+. With the help of political reforms, FDI flows into Georgia have increased from 2003 until 2008. But after the political tension with Russia, FDIs have been affected negatively. Georgia ’s FDIs  reached over 1 billion $ as FDIs in 2006 and maintained this trend until 2009. Even though crisis and political issues have affected the country terribly, Georgia managed to lift its credit note to BB- by Fitch in 2011. Using the advantage of being a member of EU since 1982, Greece got the investment grade from Fitch in 1995, the earliest in the Region of Balkan and Black Sea. Even though Greece's economy has been awarded with A in the beginning of 21 st  century, it is possible to see in the graph below that FDI flows have not increased significantly until 2006, when Greece reached  its first peak with 5.4 billion $. After the second peak in 2008 with 5.7 billion $, due to catastrophic crisis in the country, foreign investors have left from the country rapidly and the  bottom by 533 million $ was seen. It is anticipated that country will be able to have its first growth in 2014, and FDIs have increased since 2011, so have the credit ratings: Fitch awarded Greece with B- in 2013. Even though Serbia has never had an investment grade by any of CRAs, FDIs of the country have risen and passed 1 billion $ FDIs bar in 2003 and reached almost 5 billion $ in 2006. Country's credit notes from Fitch stayed stable as BB- since 2005 and global crisis touched the country as well. Serbia managed to attract foreign investors again in 2011 but yet failed in 2012, according to World Bank data. In this part of the article, the bigger league in the region in terms of attracting FDIs will be focused on. Credit rating of Bulgaria given by Fitch has been stable as BBB-, only with an exception in 2005 with an upgrade by BBB. Right after Bulgaria got investment grade in 2004, FDIs into the country has dramatically increased. An extreme drop in Bulgaria’s FDIs  was witnessed in 2009 by 7 billion $ losses due to the global crisis and since then Bulgaria has been trying to rise again, but slowly. Romania, one of the newest members of EU with Bulgaria, had an incredible long-time trend in terms of FDIs between the periods of 1997-2008. The country has seen its highest FDI value with 13 billion $ in 2008, thanks to its credit rating of BBB- given by Fitch in 2004 and also accession process to EU. In 2006, Moody's also awarded the country with Baa3 which reassures foreign investors to invest. Due to most recent global crisis, FDIs in Romania have decreased sharply and also Fitch downgraded its note to BB+, lower than the investment grade level, in 2010. Although Romania managed to receive the note of BBB- again only after $- $1000,000 $2000,000 $3000,000 $4000,000 $5000,000 $6000,000 $7000,000         1        9        9        0        1        9        9        1        1        9        9        2        1        9        9        3         1        9        9        4         1        9        9        5        1        9        9        6        1        9        9        7        1        9        9        8        1        9        9        9        2        0        0        0        2        0        0        1        2        0        0        2        2        0        0        3        2        0        0        4        2        0        0        5         2        0        0        6         2        0        0        7        2        0        0        8        2        0        0        9        2        0        1        0        2        0        1        1        2        0        1        2 Net FDI Inflows (2013, million $) CroatiaGeorgiaGreeceSerbia  a year, FDIs have not been yet affected by this positive move. Turkey, survived 2 economic crisis in only 10 years, had slight ups & downs in the period of 1990-2000 and the country passed 3 billion $ in terms of FDI inflows in 2001. Due to economic crisis in 2001, foreign investments left the country but Turkey managed successfully to restore its position and reached 10 billion $ FDIs in 2005 and doubled the number in 2006 and 2007, when the country reached its peak in its history with 22 billion $. Although the second crisis, which is not local but global this time, affected Turkey negatively as well, but with the help of economic reforms, foreign investments were flown into the country again and in 2013, both Moody's and Fitch have awarded Turkey with Baa3 and BBB-, respectively, to award Turkey with investment grades. Having political reforms lifted Ukraine's reputation up and a significant increase in attracting FDIs into the country has seen in Ukraine from 2002. The country passed 1 billion $ FDIs bar in 2003 and reached its peak in 2008 with 10.7 billion $ but numbers dropped sharply right after the crisis and also political changes. Ukraine has never received the investment grade and because of the global crisis, credit notes of the country have been downgraded to Caa1 and B- by Moody's and Fitch, respectively. Country had developed important reforms and Doing Business ranking of Ukraine decided by World Bank rose to 112 from 140 in 2013. Ukraine has been enjoying the increase trend of FDI flows last three years again. After the deep crisis in the end of 20 th  century, Russia constructed the economic developments and was awarded by Moody's with Baa3 to have the adequate investment grade to attract foreign investors. This news doubled the FDI inflows to the country in 2003 with almost 8  billion $, and Fitch became the second credit rating agency to confirm Russia having investment grade with BBB- in 2004. From this year, Russia's FDIs have dramatically $-00$5000,000$10000,000$15000,000$20000,000$25000,000         1        9        9        0        1        9        9        1        1        9        9        2        1        9        9        3        1        9        9        4        1        9        9        5        1        9        9        6        1        9        9        7        1        9        9        8        1        9        9        9        2        0        0        0        2        0        0        1        2        0        0        2        2        0        0        3        2        0        0        4        2        0        0        5        2        0        0        6        2        0        0        7        2        0        0        8        2        0        0        9        2        0        1        0        2        0        1        1        2        0        1        2 Net FDI Inflows (2013, million $) BulgariaRomaniaTurkeyUkraine


Jul 23, 2017
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