UK: SMEs And Fresh Investment Drive Growth In East Europe
Last Updated: 18 March 2015

TMF Group-commissioned research finds region benefitting from nearshoring and favourable tax environment despite unrest to the east

Solid recovery in Central and Eastern Europe (CEE) is helping to "pull up" neighbours in the South-East of the region, and the cluster of nine countries across central and south eastern Europe is making the most of a weak euro and lower oil prices, according to two reports commissioned by TMF Group and released today.

Business risks and opportunities in Central and Eastern Europe, commissioned by TMF Group and published by The Economist Intelligence Unit (EIU), finds that the business environment for small and medium-sized enterprises (SMEs) is strengthening in several countries in CEE, particularly in the Czech Republic, Hungary, Poland and Slovakia. However, businesses still face challenges in the administrative, regulatory and tax environments.

It finds economic growth will be increasingly driven by SMEs in the region, which will continue to outpace the Eurozone and wider EU. SMEs are benefiting from investment incentive schemes, improved funding opportunities and tax exemptions.

The report points out that the CEE region is seeing increased nearshoring (as opposed to offshoring) of manufacturing and service lines, particularly in Poland. Momentum for technology start-ups in countries such as Slovakia and Poland is rising. Moreover, the growth of shared service centres continues to offer major opportunities in countries like Hungary and Poland.

Yet, businesses operating in the CEE region continue to face major challenges. The report highlights areas such as excessive bureaucracy and sector-specific taxation. Red tape in public sector procurement remains an issue in several countries. Despite low corporate taxes, taxation systems remain in need of reform. The risk of arbitrary legislation, such as sector-specific taxes, is a problem.

Meanwhile South East Europe (SEE), which has been lagging behind in the recovery stakes, might now be worth a fresh look for those corporate executives under pressure to find growth globally, according to the CEEMEA Business Group in research commissioned by TMF Group. 

Companies that are expanding their business in the SEE region look to benefit from the generally stable economic growth, as well as corporate tax levels that are lower than in the majority of Western European countries. The SEE countries (Bulgaria, Croatia, Serbia and Slovenia) are home to around 20 million people in total, and international business is looking at these locations for new growth potential.

Companies are expecting these markets to grow, putting Bulgaria and Serbia among the top 10 countries by expected organic growth in 2015. 

While SEE continues to offer growth opportunities, there are also risks for business. Potential investors and international companies have to be well prepared to deal with the risks and get support of local experts that have vast experience of dealing with rapidly changing legislative and regulative environments. Risks also remain from any slowdown/deflation in the Eurozone and any worsening of the crisis in Russia and Ukraine.

Martin Koehring, EIU editor, said: "The CEE region continues to offer a plethora of evolving and diverse business opportunities and risks. Potential investors cannot ignore the interaction of these risks and opportunities. The growing importance of SMEs, for example, will shape the business environment in the region."

Daniel Thorniley of CEEMEA Business Group said: "With much of Europe and global markets still underperforming in 2013-15, the core CEE region started to pick-up noticeably and, thanks to a mini-rally in the Eurozone and to expanding credit emission from banks, consumers also started to spend more. The relative surge in economic numbers has abated in recent months as the growth cycle is tempered. But as companies look for growth to compensate for weak markets generally, the CEE region has turned out to offer "a nice little cluster of markets"; when you do group the main CEE markets together, you have a solid population and a range of different types of markets and consumer segments to penetrate. Generally this good news wasn't reflected to the same extent in SEE with the exception of Romania. But even in the SEE region we are now seeing some decent initial signs and pockets of business growth."

Juraj Gerzeni, Head of EMEA for TMF Group, said: "After several difficult years, with the exception of Poland, the CEE region shows positive trends for the international environment. However, complex reporting and tax systems in addition to rapidly changing legislation and uncertain business transparency make it a long road to robust recovery. While Central European countries and Romania are showing positive numbers, South East Europe is still lagging behind in growth and size, but offers greater opportunity and a SEE cluster of countries. Of course, each country has a very different business environment and unique regulatory requirements, making it difficult for international business to be compliant with the local regulations. As such, working with a local partner can help companies to make the most of the opportunities on offer."

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