Emerging markets have been excellent opportunities for business growth over the last decade.  However the global recession has hit every country around the world.  So how have emerging markets fared during this global downturn?  How can a company board looking for growth opportunities assess these markets based on return and risk?  I recently delivered a presentation on this topic at the Baptie Channel Focus Europe conference where IT sales and marketing directors gathered to learn best practices.  My talk titled “Selling the value of investing in Central and Eastern Europe to the ‘C’ level in your organisation” compared the opportunities for growth in the emerging markets of Europe with those of developing Asia.

One way to assess returns in emerging markets is to look at projected economic growth in gross domestic product, or GDP, which is the sum of production of goods and services in that country.  Earlier this decade, the countries of Central and Eastern Europe were growing well at 6% on average from 2001-2008.  However, CEE countries today face difficult times and declining economies due to the large government debts that the countries ran up as they raced to build infrastructure.  Company profits are suffering due to the global economic slowdown.  Caught with a declining tax base, these countries could not scale back spending fast enough.  The worst hit have been the countries of Estonia, Lithuania, and Latvia once known as the Baltic ‘tigers’ in the boom time are now in the bust and predicted to contract by 6% to 11% in GDP over 2009-2011, according to the Economist Intelligence Unit.  In CEE, the notable exceptions are Poland and Romania who have fared better and are posting small growth increases technically avoiding recession altogether.  How does the growth in CEE compare to Asia?  Although growth rates in the developing Asia countries have dropped from the strong 7.5% of the previous years 2001-2008, the market is still performing better than other emerging markets globally growing this year at 4.5%.  Asia growth stars like India and China entered the recession in better shape than their emerging market peers, having better current account surpluses, larger export driven economies and a deeper resource base of people and materials from which to draw. 

Is Central and Eastern Europe still a good place to invest compared to Asia?  The countries of CEE are still less risky than Asian markets, however this gap is narrowing.  Over the earlier part of this decade, CEE countries were some of the lowest risk investments in emerging markets.  This is because they were joining the European Union which brought a well developed system of laws and regulations, plus free trade with Western European markets.  Asia was more risky.  China is a communist country.  India at times has put stiff regulations on international payments and foreign direct investment. However, the risk gap has been closing over the last years.  The OECD rates countries on whether there is a credit risk of getting paid for goods and services exported there.  Czech Republic gets a zero rating which means there is virtually no risk to receiving payment for your goods sold there.  Poland receives a 2.  However, this score is equal to China at 2, and India is not far behind at 3.  Some countries in CEE, like Romania and Bulgaria, are higher risk at 4.  Looking more broadly at business risk, the Economist Intelligence Unit publishes a ranking of all countries based on several qualitative factors.  Most of the countries of CEE are higher in the list than Asian countries of China and India, but just barely.  Clearly, the emerging markets of Asia have been making strides to reduce their risk profile.  Meanwhile, business risk in CEE has risen slightly due to the recent recession.  The risk gap between CEE countries and developing Asia is closing.

So does this mean that all investment resources should be diverted to Asia and not to Central and Eastern Europe?  Clearly the answer is no.  Growing business in emerging markets is about pursuing a balanced investment strategy to spread the risk.  While Central and Eastern Europe may not generate the high returns on the average of the Asian markets today, it is generally less risky.  CEE countries are part of the EU and a large common trading bloc.  The country governments there continue to place huge investments in subsidies as part of the €176 Billion investment that the EU is making in structural funds to improve these economies.  Many private companies can receive grants and have 50% or more of the projects paid for as long as they follow certain guidelines listed in the published calls for proposal. 

The recession has indeed changed the investment opportunities in emerging markets.  The Asia growth engines of India and China have emerged relatively better than other markets like Central and Eastern Europe.  However, it is best for management boards to balance risk versus reward.  Generating a positive ROI at the lowest possible risk means spreading out investments into a portfolio of emerging markets projects. 

(Download the slides here from the companion presentation.)