Eastern Europe's Corporate Sector and the Current Economic Crisis

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by Brian Hoyt

I attended a discussion yesterday morning on the impact of the global economic crisis on the corporate sector in Eastern Europe. World Bank Senior Economist Paulo Correa presented the preliminary results from the Enterprise Financial Crisis Assessment Survey (note: this is preliminary data).

The survey, implemented in May/June 2009, covered more than 1,500 enterprises from non-agricultural, private sector, formal firms in Bulgaria, Hungary, Latvia, Lithuania, Romania and Turkey.

Some of the key findings include:

  • Roughly 89 percent of companies in Eastern Europe have been affected by the crisis, including 100 percent of Hungarian firms. The impact was profound, regardless of company size, sector or location
  • Permanent, full-time employment was reduced by an average of nearly 10 percent
  • The drop in demand was the most relevant impact of the crisis for all countries. This is a demand-side crisis
  • Among the most affected firms (the bottom 25%), one-third suffered a minimum 40 percent drop in sales. It is also interesting to note that these firms had above-average pre-crisis growth rates
  • Firms reacted to the crisis by increasing the use of internal funds to finance working capital
  • In the near-term, firms expect reduced sales, layoffs, and to fall in arrears, but should be able to pay back their liabilities in the medium-term

Many Emerging Markets have shrugged off the crisis precisely because it was not their crisis. This is less true for Eastern Europe, where many economies, especially in the Baltics, indulged in the pre-crisis boom (Latvian house prices increased by 61 percent in 2006 alone).

Now, many are suffering from the hangover, especially those firms which had higher pre-crisis growth rates. Fortunately, as this survey data indicates, most expect to make it out of the crisis in one piece.