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

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 20th 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 18th 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 21st 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 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 20th 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 increased to 75 billion $ in 2008, the highest in its history. Right before crisis, Russia's credit notes were Baa1 and BBB+ by S&P and Fitch, respectively. Although Russia has been affected by the crisis as well as other countries and FDIs have decreased to half of the previous year in 2009, country managed well to have the increasing FDI trend and kept its credit notes stable with economic reforms.

Indeed not only economic reforms, development steps are necessary for a country’s performance on FDIs but also political reforms and politic sustainability are significantly efficient. Bulgaria, Romania and Russia have benefited from credit note changes and their performances of FDIs have been boosted at the time they have had investment grades from Fitch. Not with the same level but still, all countries were affected by global crisis. Among others, Russia, Bulgaria, Romania and Turkey had experienced a great number of loss in their FDIs due to global crisis but Russia and Turkey have recovered quickly by a rapid positive trend in 2010. Only in Bulgaria and Romania, FDI flows have not increased since the crisis. For Doing Business rankings, it is normal to say that Russia, Ukraine and Greece have performed well in 2013 compared to 2012. The ranking also plays a crucial role for investors before taking an investment decision in a country and the positive performances are extremely important for the economic development of the region. Since Vladimir Putin has been re-elected as President of Russia, the political tension has been recently not high and thus CDS numbers have been decreasing. On the other hand, Ukraine and Turkey have been struggling with political problems and this situation causes FDIs leaving from the country. 

Country	FDI Boost?	Experienced Global Crisis?	FDIs Fall Value (billion $)	First (+) Sign for FDIs	Doing Business Performance	Political Stress?
Bulgaria	✓	✓	12.0	-	-1	✓
Croatia		✓	5.3	2011	-1	-
Georgia		✓	1.2	2010	+1	✓
Greece		✓	5.2	2011	+17	✓
Romania	✓	✓	11.0	-	0	✓
Russia	✓	✓	38.0	2010	+19	-
Serbia		✓	3.6	2011	-6	✓
Turkey		✓	14.0	2010	+3	✓
Ukraine		✓	6.0	2010	+28	✓

Analyses show that performances of FDIs and their interactions with credit notes are alike in some countries in the region. Especially Bulgaria and Romania which joined the EU in 2008 have almost the same increasing trend history in terms of FDIs and also their reactions to global crisis.

2013 has been a year with small crises in the region; political tension in Turkey increased in May and again in December, and also in Ukraine at the end of the year. Fed’s policy on quantitative easing had an unexpected outcome on the emerging economies where the region is all about. FDI flows for 2013 are not published yet, but an increase in FDIs is anticipated in Bulgaria and Romania. Serbia, which is the new candidate member of EU will likely continue its slow positive trend in FDIs following years. FDIs in Turkey and Ukraine might keep stable or have slight changes compared to recent years. Russia on the other hand will probably enjoy the increasing trend in their FDI flows to the country. Greece that is expected to have the first growth rate since the crisis and also takes the presidency of EU, may maintain its positive trend in FDIs. Croatia will be using the benefits of being a new member of EU and attract FDIs and the country could keep a good record in the following years with possible economic reforms. With the new elected leader, Georgia will work more on attracting foreign investors and it would be normal to see this happening with the country’s easiness of doing business.