Influence of foreign direct investment on macroeconomic stability

Presenter:Governor CBBH: Kemal Kozarić

Content

Introduction Current account deficitForeign direct investmentCBBH expectationConclusion

Introduction

There are many preconditions for the growth of one small open economy as it is economy of BH, but some of the main preconditions are:

Good business environmentFinancial stability of the countryStabile exchange rate

Introduction

Year 1998 1999 2000 2001 2002 2003 2004 2005

Nominal GDP in KM billions  7,2  8,9 10,0 10,9 11,6 12,3 13,4 14,7*

Retail price growth (%)  13.8 3.7  4.8 3.1 0.4 0.6 0.4 3.6

Foreign reserves in KM millions 283 866 1021 2696 2464 2781 3457 4195

Foreign reserves in months of goods 0.5 1.4 1.5 3.6 3.2 3.4 4.0 4.2

Trade deficit in KM millions -5,482 -6,052 -5,868 -6,470 -6,892 -7,255 -7,193 -7,833

Achieved results in referred period:

Estimate CBBH*

Current account deficit

0% 2% 4% 6% 8% 10% 12% 14% 16%

Mineral fuels, mineral oilsMachinery and mechanical appliances

Vehicles (not railway, tramway, rolling stock)Electric machinery

Plastics and articles thereofPharmaceutical products

Beverages, spirits and vinegarCereals

Miscellaneous edible preparations Paper & paperboard

Tobacco and manufactured tobacco substitutes

2005 2004 2003

Product groups participation in trade deficit for the first twelve months

Current account deficit

Current account deficit

Important question that has to be raised in a country with high deficit is:

How deficit is financed? Balance of payments is a “balance” so by definition, deficit of one component has to be financed by a surplus of some other components.

Is deficit sustainable and will a country face an external sector crisis?Currency crisisForeign debt crisis

Current account deficit

Looking ahead: It is difficult to expect that BH economy can only rely on transferes!The item in balance of payments that has the most potential to change rapidly is foreign direct investment. But for BH to attract more foreign direct investment, BH has to build economic environment that will be interesting for domestic investors and by itself it will become interesting for the foreign direct investors too. Government should impose a set of measures that will faster privatization, as well as, impose measures that will enable higher productivity of the private sector, which can contribute to the faster results in increase of export capacities of BH.

Current account deficit

In order to improve external trade situation in BH it would be recommended to conduct a detailed micro analyze of goods that have the highest influence on BH import increase by identifying all main trading partners in foreign trade exchange, as well as, their price, quantity and type of imported goods.

Improve BH agriculture policy by promoting BH agriculture on international market and especially by solving internal limitations and obstacles for the exports.

Special attention should be given to development of export capacities of the country and especially to the component of raw materials which should be protected.

Encourage infrastructure development in the field of quality standard certification in accordance with EU rules.

Current account deficit financing

-8%

-15%

-21% -23% -21% -22%-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2000 2001 2002 2003 2004 2005

Current Account FDI Other investment NEO

Current account deficit

13%6%3%

(in GDP %)

Foreign direct investmentBy regular survey that CBBH conducts, data for the first nine month of 2005 are recorded. Estimated FDI inflow in 2005 is about KM 470 million.

Foreign direct investment

0200400600800

10001200

2002 2003 2004 2005

Direct investment

Foreign direct investmentShort analyze highlights the following:

In the first nine months of 2005 FDI inflow was reduced by 36.9%

Total inflow of foreign investment was reduced by 31.7% Highest value of FDI is in amount of KM 117 million which is

investment capital from Austria. Investors which invested more in 2005 compared to 2004 are:

Slovenia, Turky and USA. Regarding the sectorial structure the highest investment were

recorded in banking sector 50% and manufacturing sector 42% out of total FDI.

Highest outflow, out of total FDI, was recorded in tourism sector (-9%), trade sector (-9%) and nonbanking sector (-10%)

Foreign direct investment

State of foreign investments : Is a separate statistical category and it does not represent a sum

of all previous flows, but also other changes such as exchange rate differentials, accounting changes, etc.

Foreign investments at the end of 2004 amounted to KM 5.9 billion.

Foreign direct investment amount to KM 3.8 billion, and portfolio and other investments to KM 2.1 billion.

Out of KM 3.8 billions foreign direct investments more than two thirds, that is 68%, is in the form of owner’s equity, and the rest is in inter-company loans and other forms of investment.

CBBH expectationsPresented data are showing that there is a space for investment inflow in BH to come, but in order for investments to come promotion of investment and necessary conditions preparation requires more aggressive approach and the best way is through efficiency in reform scenario implementation. Political stability, economic progress, as well as, country’s image represents the key elements for FDI inflow in single economy. Economic growth can be achieved through intensive development of the real sector of the economy, through efficiency in reform implementation and especially through fiscal reforms and through setting up the conditions for strengthening of the business environment.

CBBH expectationsThe part that is related to fiscal reforms is mainly related to:

Adequate allocation of public revenues Decrease public spending Improve transparency and responsibility in collection and spending of

the public revenues Support development of entrepreneurship and encourage growth of the

private sector and work on constant decrease of the political risk

Establish business environment Strengthening of a single economic space in BH Improve efficiency of the legal system Establish legal and institutional framework for free competition and

consumer protection Stimulate regional economic development Increase mobility of the labor force Remove all administrative barriers to domestic and foreign investments

ConclusionThere is still a lot of work on which country as a whole needs to work more on its way toward stability. Macroeconomic frame is very important, economic activity has to be measured in details by sectors and the rate of growth, as well as, productivity, competitiveness, real effective exchange rate, transparency etc. Potential of the real sector of the economy has to be used for future development of BH economy. This should be recognized by all levels of the government, as well as, by appropriate institutions which should work together continuously on the implementation of reforms that will lead BH towards a road of a desired development.