Against the backdrop of the collapse of communism and the disintegration of established regional structures, the Visegrad Agreement created a regional alliance to promote political stability, economic growth and prosperity by strengthening social and economic cooperation between the Czech Republic, Hungary, Poland and Slovakia. Fifteen years later, in 2006, the alliance has successfully supported the establishment of democratic government, and entrenched political stability and economic growth in all four countries, symbolically culminating in accession to the European Union in 2004. This process of transformation has not only brought prosperity to their people and enhanced the countries' international political profiles, but it has also opened up significant strategic opportunities for international financial markets and investors worldwide.
Citigroup was amongst the first financial institutions to recognise the enormous growth potential of the Central and Eastern European region, in particular the four Visegrad nations. From the very start, the bank has supported growth and is proud to have a long-established presence in all four economies, dating back to 1986 when Citibank first opened in Budapest. In the intervening period, Citigroup has significantly expanded its footprint, including acquiring the 135 year-old Polish institution of Bank Handlowy as part of its total investment of well over $2 billion in the region.
Today, Citigroup boasts thriving corporate and retail banking businesses in all four Visegrad markets, serving businesses and consumers and partnering with them to support their evolving financial needs. The company has also built upon the intra-regional growth and development by establishing a regional operations and processing centre in Poland. Initially focused upon back-office processing and operations within the Visegrad region alone, in recent months the firm has made the strategic decision to build out this resource to service operations within the wider Europe and Middle East region, following a model first employed in India. This growth further cements the Visegrad economies as a centre for growth and development for Citigroup's business as a whole, underpinning operations throughout Europe. Evidence of the strategic importance that the firm places upon the region was underlined earlier this year, when the International Advisory Board meeting was held in Prague.
The Visegrad opportunity
Citigroup is by no means alone in embracing the strategic opportunity that the Visegrad region represents. Geographically accessible to both Western Europe and the rapidly expanding markets of Russia and the East, politically stable and a part of the European Union's evolving single market, the region occupies an important strategic position in global markets.
Political and economic liberalisation coupled with foreign direct investment averaging some 30 percent of GDP per annum have injected capital, products, new technology and tested risk management processes to both the retail and corporate segments of these growing markets, effectively allowing them to "leap-frog" into the latest banking products and structures. Substantial banking reform such as restructuring bank balance sheets, recapitalizing financial institutions, the development of effective capital market regulation and privatization in partnership with international investors have paved the way for a stable, sophisticated financial system with well-capitalized banks and a growing number of institutional investors in the form of newly created insurance and pensions companies. In addition, the structure of capital markets has evolved, with bank lending moving from 30 percent of GDP in the mid-1990s towards the 90-100 percent of GDP levels of more established economies.
Growth has been particularly marked in the retail sector, where the evolution of consumers' needs throughout the market has meant that assets are increasing faster than in the corporate sector, largely as a result of broader access to the full range of retail finance products, particularly through the growth in mortgage lending activity. This process has been bolstered by entry into the EU, as banks have become disintermediated as deposit takers and lenders are increasingly affording retail consumers direct access to investment and insurance products from across the single market. This represents a significant opportunity for international as well as domestic investors.
Capital market liberalization has increased liquidity by almost 500 percent within the region over the past five years. Indeed, the Warsaw Stock Exchange has reached a market cap of 50 billion euros in just 13 years, reflecting the successful growth of the economy as a whole: Polish real GDP growth has averaged 3 percent since 2000.
In the wake of the recent economic downturn, these figures are not only competitive in comparison to the rest of the single market, but are also within striking distance of leading world economies; for example, Slovenia achieved 6 percent GDP growth in 2004 and topped 5 percent growth in 2005, in comparison to 6 percent growth in Russia last year.
Bolstered by membership in the single market, corporate borrowers are also beginning to branch out of their home market to seek capital in the more developed European markets. Strong growth is creating an increased demand for capital, and much of this money is coming from European markets in addition to global regions including the US and Asia. This process has been facilitated by in-region investment by international firms who are now leveraging growth opportunities in partnership with colleagues and distribution networks worldwide.
Challenges to growth
Of course, in globalized capital markets, no country is immune to competition from all corners of the globe. Increasingly, the Visegrad countries are competing against other growth economies such as Russia, China and India, both as places to invest and as sources of funding. But the development of Asia has also brought growth to the region as well, as new groups of foreign investors seek to target opportunities in high-growth regions of the world. Here, Citigroup is leveraging the experience of its business throughout the Asia Pacific region to support the opening of markets and to enable the Visegrad region to make the most of its strategic geographic, economic and political advantages in a global marketplace.
A major concern for capital markets authorities in the Visegrad states is whether domestic stock markets will be overwhelmed by the larger markets in Western Europe. This is indeed a valid concern, as corporate issuers will seek out the maximum liquidity for their instruments. While the newly developing national pension funds, insurance companies, retail investors and mutual funds are increasing investment on the domestic markets, the attraction of listing on Western Europe's exchanges is still very strong for larger players, such as the Polish telecom provider TP SA, listed in Luxembourg. Nevertheless, domestic capital markets in the new member states are essential to growth and there will always be a need from certain corporates to raise capital in their local market. At the same time, not every corporate will have easy access to the capital markets in Western Europe. Over time, these markets will work out the most efficient way of dealing with respective companies.
Secondly, the Visegrad countries felt the effects of very low growth between 2001 and 2003 as a result of macroeconomic factors and the widespread downturn in international capital markets. Since then, however, the recovery of the Visegrad countries in particular has been strong, a fact which has been attributed to growing domestic demand in retail and from the increasing institutional investors in the market, together with inward investment from the EU and increasingly from investors in the US and Asia as well. Increased inward investment into the growing market economies has bolstered overall growth and created many opportunities for investors today.
The future outlook
The Visegrad region has made a remarkable success of aligning and strengthening financial services to meet the challenges of an enlarging European Union and to compete effectively with larger and more developed countries both regionally and internationally. Governments, regulators and market participants have shared information and knowledge to achieve growth and competitiveness, cementing sustained GDP growth of between four and five percent, through the right mix of capital investment, technology and productivity. The success of the Visegrad model has also been bolstered by a number of similar agreements both within the wider European region and throughout the world.
The strong banking and financial system that has been put into place will help to foster and sustain the region's growth, in partnership with investment from international companies and individuals who recognise and are tapping into the continued potential of these markets.
Shirish Apte
Chief executive officer of the Central and Eastern Europe, Middle East and Africa (CEEMEA) Corporate and Investment Bank (since February 2003). Previously worked as the country business manager for Citigroup with Citibank Handlowy in Poland.
