Is the Worst Over for Eastern Europe?

by: Private Sector Development

By Brian Hoyt

The World Bank's Enterprise Surveys team has published a new survey of businesses in Eastern Europe, analyzing the long-term effects of the financial crisis in the region. The report looks at survey data collected last summer from over 1,600 firms in Bulgaria, Hungary, Latvia, Lithuania, Romania and Turkey, finding that the crisis has had a detrimental effect on demand:

Survey data show that in these countries, the major effect of the crisis is a drop in demand. It is not a financial crisis—it is a demand crisis. Sales and capacity utilization decreased in all six countries. Accompanying a drop in demand is a drop in employment, which affects mostly permanent employees.

Permanent employment declined in five countries, while temporary employment declined in four. In all countries but Romania, firms are using more internal funds to finance their working capital. However, there is evidence that some firms are in extreme financial distress, especially in Romania. On a more positive note, in four out of the six countries sampled, the majority of firms do not expect sales to further decrease.

In Turkey, over 6.8% of manufacturing firms have filed for insolvency or bankruptcy. Romania and Latvia also experienced high rates of firms closing down or filing for bankruptcy: (Click to enlarge)

Sector Bankruptcy in Eastern Europe While the effects of the crisis have been disproportionately painful in much of Eastern Europe, many firms believe that the worst is over. The outlook for the future is largely related to how an economy performed during the crisis: Turkey, which has already returned to growth, has much more optimistic entrepreneurs than Hungary and Latvia, which are still trying to tread above water.