FINANCING THE CURRENT ACCOUNT DEFICIT IN SOUTHEASTERN EUROPEAN COUNTRIES

Priliv stranog kapitala u zemlje jugoistočne Evrope (JIE) pre izbijanja finansijske krize iz 2008. godine, podržavao je rast domaće tražnje, koja se jednim delom zadovoljavala iz uvoza. To je uslovilo širenje deficita tekućeg računa. Liberalizacija spoljne trgovine je olakšala uvoz i doprinela rastu trgovinskog deficita. Priliv kapitala u ove zemlje pojačan je niskim kamatnim stopama na strana sredstva, kao i povećanim iznosima raspoložive globalne likvidnosti. Snažna domaća tražnja generisala je visoke stope privrednog rasta. Međutim, značajan rast cena i nadnica, pre svega zbog očekivane konvergencije dohotka, oslabio je sektor razmenljivih dobara u ovim zemljama. Rezultat je visok porast strane zaduženosti, bez odgovarajućih kapaciteta za servisiranje dugova, kao i slabljenje konkurentnosti privrede. Olakšavajuća okolnost za ove zemlje je značajan neto priliv stranih direktnih investicija (SDI), kao važan kanal finansiranja deficita tekućeg računa. Kod zemalja ovog regiona je nastupilo prilagođavanje posle izbijanja globalne ekonomske i finansijske krize, uz prateću redukciju deficita tekućeg računa. Međutim, glavni pravac za finansiranje održivog deficita tekućeg računa je povećanje izvozne konkurentnosti i izvoznih prihoda. Na taj način bi se smanjivao trgovinski deficit, a time bi se i deficit tekućeg računa doveo u održive okvire. Neto priliv SDI je alternativni izvor finansiranja deficita koji ublažava teret spoljne zaduženosti. Međutim, i kod ovog vida priliva kapitala mora se imati u vidu mogućnost repatrijacije profita i eventualno povlačenje kapitala, što bi otežalo finansiranje dostignutog deficita tekućeg računa.


Introduction
The SEE countries were faced with a rising CA deficit before the global financial crisis erupted in 2008.This deficit is financed by foreign borrowing and FDI inflows.In some countries, the CA deficit has crossed the limit of 20% of GDP.Although the deficit has become unsustainable in the medium term, the main difficulty lies in the fact that borrowing is not used to finance the production capacities that could produce for export purposes, but to invest in the production for the domestic market.The rest of the deficit was related to current spending.The external indebtedness of most SEE countries has approached the threshold of 80% of GDP, that is, the boundary through which it crosses into the indebted area, which makes it difficult to access the international capital market.That is why, after the outbreak of the crisis in 2008, these countries put more and more emphasis on stimulating the FDI inflows.These funds are more favorable than foreign loans because they do not carry the debt servicing burden, and the risks of their placement are carried by private investors.Increasing export competitiveness and thus exports should be the main channel for reducing the external debt burden and financing a sustainable CA deficit.The inflow of foreign capital into SEE countries conditioned the appreciation of the real exchange rate, with the accompanying weakening of export competitiveness.In some surveys, these countries are suggested to limit wage growth in order to improve competitiveness and CA deficit (Gabrisch, 2015).This paper analyzes the trends in the CA deficit of SEE countries and the mechanisms for its financing.

Tendencies of the Current Account Deficit and its Financing
The CA deficit of SEE countries had an oscillatory dynamics in the period from 2000 to 2015.We will pay particular attention to the Western Balkan countries that are in the process of accession to the European Union (EU).Chart 1 shows the average CA balance in the Western Balkan countries.These countries are also shown separately due to the fact that they are in the free trade zone.Also, the countries of this region have similar characteristics in terms of the economic structure.
All Western Balkan countries have recorded a persistent CA deficit since 2001.Its highest value was achieved in the crisis year 2008.In the period after 2008 there was a reduction of the deficit in the range of 0 to 20% of GDP.Borrowing abroad is the main source of financing the deficit in the Western Balkan countries.In this way, they bridge the gap between lower domestic savings and larger investments.If foreign funds are not used to build productive capacity, the country's ability to repay debts will be diminished, and insolvency is also inevitable.This raises the question of sustainability of the CA deficit.Problems can also arise due to sudden withdrawals of capital, in which case the countries would have to make a CA surplus which will be allocated for debt repayment.A steady CA deficit can increase the economic vulnerability of these countries.This problem can be mitigated by a stable inflow of long-term capital such as FDI. 1 By removing structural weaknesses, this type of capital inflow can be strengthened.For the purpose of completing the picture of the movement of the CA balance in other SEE countries, Figure 2 is given below.
The analysis of the dynamics of the CA balance in the other SEE countries (Figure 2) shows that all of them experienced a sharp deterioration of the CA balance in the pre-crisis period, particularly in the sub-period from 2005 to 2007.Bulgaria and Romania registered the largest CA deficit in 2007, and Croatia and Moldova in 2008.A decreasing trend of the CA deficit since 2009 is evident and can be seen as part of the global phenomenon of a structural balance of payments adjustment in the euro area.The adjustment was particularly emphasized in the peripheral Eurozone members during the financial crisis (Cesaroni, T. and De Sant, R., 2015, p. 2).In some countries this adjustment is the result of a reduction in domestic demand and imports.
Croatia and Bulgaria have made a small surplus in the period 2013-2014, but the other two countries (Romania and Moldova) have moved into deficit of around 5% of GDP.Rebalancing the balance of payments in the euro zone members was due to a decline in domestic demand larger than the decline in output.At the same time, the descending economic activity was responsible for the rebalancing more than the alignment of the balance of payment was the result of the catchingup effect.Some authors believe that the boom in domestic demand in the period before the 2008 was a more important cause of the CA deficit in SEE countries than it was the loss of price competitiveness (Wyplosz, 2013).Table 1 contains the average value of the CA as a percentage of GDP in the SEE countries for the period 2000-2015.All countries had a significant CA deficit in that period (the lowest average value of 3.1% was in Croatia), but in Bosnia and Herzegovina and Montenegro the CA deficit was higher than 10%.The unweighted average of the CA balance for all SEE countries was 8.4% (9.9% for [2000][2001][2002][2003][2004][2005][2006][2007][2008].Table 1 also shows the average fiscal balance as a percentage of GDP for the sample period.The countries included in the sample period had a fiscal deficit of 2.7%. Table 1 also shows the average ppp-adjusted GDP per capita, the average value of capital expenditures, and the average values of public consumption.The average value per capita GDP in the observed sample is 11459 USD.The average value of the coefficient of investment for the entire sample was 24.9%, while the average value of public spending is 19.4%.Most SEE countries in this sample had higher investment ratios than the average for the OECD countries (21.7%) and the EU (21.2%).At the same time, the average value of public spending (public spending ratio) in the SEE countries was lower than in the OECD countries (20.4%), but higher than in the EU (17.9%).Da bi ukazali na neke važnije međusobne odnose makroekonomskih varijabli, u grafikonu 3. se daje prikaz odnosa prosečne vrednosti tekućeg računa naspram fiskalnog bilansa, per capita BDP, investicionog količnika i količnika javne potrošnje, između zemalja.
Dijagram racija investicija u grafikonu 3. odstupa od pretpostavljene međuzavisnosti u intertemporalnom modelu, dok su ostali dijagrami u skladu sa pretpostavkama modela.To indicate some important mutual relations, Figure 3 gives the overview relations between the average value of the CA and fiscal balance, per capita GDP, investment ratio and ratio of public spending among the countries.
The diagram of investments ratio deviates from the hypothesized relationships of the intertemporal model, while the other diagrams are in accordance with the assumptions of the model.The coefficients of determination in Figure 3 have little value because they are calculated based on the relations between information rather than the cause-and-effect relationships of the observed macroeconomic variables.
A significant part of FDI in the SEE c o u n t r i e s , which are in the process of transition and privatization, has gone into p r o d u c t i o n non-tradable goods, which reduced their impact on exports.Before the onset of the 2008 crisis the CA deficit was significantly supported by inflows of foreign capital.The decline of the interest rates on international capital markets facilitated borrowing under favorable terms, which accelerated the accumulation of foreign debt and the CA deficit increase.
The increase in debt has not been accompanied by the increase in capacity to service this debt.
The appreciation of the national currency, spurred by the large inflows of foreign capital, has led to the deteriorated export competitiveness.After the outbreak of the crisis, all countries recorded a reduction in their CA deficits, primarily due to the weakening of economic activity and the reduction of imports.The liberalization of foreign trade has had not only a positive impact on the competitiveness of the economy and the strengthening of competition on the domestic market, but has also opened up the channel for increasing the CA deficit.In this way, the increasing openness of the economy imposed the issue of sustainability of the growing CA deficit.Chart 4 shows the tendencies of the openness of the economy of the Western Balkan countries.Trgovinska otvorenost u grafikonu 4. prikazana je kao količnik zbira uvoza i izvoza robe i usluga u odnosu na BDP, za svaku zemlju pojedinačno, i za EU.Globalno posmatrano, zapaža se da je stepen otvorenosti kod zemalja zapadnog Balkana opao u 2009.godini, kad je globalna finansijska kriza svom žestinom pogodila ovaj region.Zatim je usledio trend oporavka ovog pokazatelja.Region ne zaostaje, prema ovom pokazatelju, za zemljama EU.Zapravo, trgovinska otvorenost većine zemalja zapadnog Balkana veća je nego u EU.Ovaj rezultat je posledica većeg udela uvoza robe i usluga u BDP-u zemalja zapadnog Balkana nego kod EU.Perzistentan trgovinski deficit zemalja ovog regiona, i visoka spoljna zaduženost umanjuju doprinos neto trgovine privrednom rastu.Manji udeo izvoza zemalja zapadnog Balkana u njihovom BDP-u u poređenju sa EU nastaje zbog njihove manje integrisanosti u evropske lance isporuke, kao što to potvrđuje novija studija OECD (2013).Takođe, manja je sofisticiranost industrijskih proizvoda koji se izvoze nego što je to slučaj u EU.Kod većine zemalja zapadnog Balkana u izvozu dominiraju radno i resursno intenzivni proizvodi, ili proizvodi niže tehnološke intenzivnosti.Za razliku od zemalja zapadnog Balkana, zemlje EU imaju visok udeo tehnološki intenzivnog izvoza, i njihova specijalizacija ide u tom pravcu.Sa ovakvom slikom suočiće se zemlje zapadnog Balkana u momentu stupanja u članstvo EU.Dinamično investiranje u infrastrukturu u regionu, sa istaknutom ulogom kineskih investicija, postaje važan činilac u podizanju izvoza na viši nivo.Dobro razvijena saobraćajna infrastruktura važna je pretpostavka za konkurentnost regiona i njegov privredni razvoj.Dugo zanemarivana, ova infrastruktura je u brojnim slučajevima ograničavajući činilac povećanja izvoza (Sanfey et  Trade openness in Chart 4 is shown as the ratio of imports and exports of goods and services in relation to GDP, for each country individually, and for the EU.Globally, it can be noticed that the degree of openness in the Western Balkan countries declined in 2009, when the global financial crisis strongly affected this region.This was followed by the trend of recovery of this indicator.According to this indicator, the region does not lag behind the EU countries.In fact, the trade openness of most Western Balkan countries is higher than in the EU.This is a result of the higher share of imports of goods and services in the GDP of the Western Balkan countries than in the EU.The persistent trade deficit of the countries in this region, and high external indebtedness, reduce the contribution of net trade to economic growth.The smaller share of Western Balkan countries' exports in their GDP compared to the EU is due to their lower integration into the European supply chains, as confirmed by a recent OECD study (2013).Also, the exported goods are less sophisticated compared to the EU.In most of the Western Balkan countries, the exports are dominated by labor and resource intensive products, or products of lower technological intensity.Unlike the Western Balkan countries, the EU countries have a high share of technologically intensive exports, and their specialization goes in that direction.With this picture, the Western Balkan countries will face the moment of joining the EU.The dynamic investment in infrastructure in the region, with a prominent role of the Chinese investments, is becoming an important factor in raising exports to a higher level.The well-developed transport infrastructure is an important prerequisite for the competitiveness of the region and its economic development.Long neglected, this infrastructure in many cases is a limiting factor in the increasing of exports (Sanfey et al., 2016, p. 27).A stronger interconnection among the Western Balkan countries within the CEFTA agreement, as well as the signed EU Stabilization and Association Agreements, open the space for increasing the share of their export of goods and services in GDP.
The traditional form of financing the CA deficit of SEE countries is borrowing from abroad.In order to assess the degree of external indebtedness of these countries, we will use Chart 5.
Many SEE countries had a tendency to increase the external debt ratio (the ratio between external debt and exports of goods, services and primary income) in the period from 2000 to 2009.A dynamic jump in this coefficient was achieved in the period 2006-2009, and then, as a result of the global financial crisis, there was a decline.It is obvious that all SEE countries had a significant basis for borrowing from abroad as a source of financing the CA deficit.The fall in the world import demand, due to the outbreak of the global economic crisis in 2008, led to a slowdown in export growth, which also weakened the pace of external borrowing of the SEE countries.Cyclical factors, such as the weak import demand, low raw material prices and slowing economic growth in China, have contributed to the decline in world trade (World Bank Group, 2017, p. 61; Constantinescu et al., 2015).
Izvor the outbreak of the financial crisis in 2008, which required the significant state financial assistance.These expenditures significantly increased the public debt that was already high due to a fiscal imbalance (Laeven and Valencia, 2013).The high private sector's indebtedness in the Southeastern European countries can also be a factor responsible for the destabilization of the public sector in those countries.This is especially noticeable in the countries with high and rising levels of non-performing loans (NPLs).
On the other hand, the revival of exports in recent years has contributed to the increase in export revenues, which has affected the reduction of the above-defined external debt coefficient.Nevertheless, in several SEE countries the value of this coefficient exceeds 200%.This actually indicates that the level of external indebtedness of the countries in this region is high, and that in the coming years, the support must be sought in the increased inflow of FDI.In this way, the external debt service may relax, thereby creating the possibility of maintaining a small CA deficit without additional external borrowing.However, one must not forget the fact that a large FDI inflow means that the repatriation of the realized profit can be expected in the future, rather than its infinite reinvestment.This will imply an increased outflow of capital, while reducing the net inflow of FDI as an important source of financing the CA deficit.At that moment, the country must reduce their CA deficit toward the sustainable levels compliant with the available resources for its financing.
A significant source for financing the CA deficit of Southeastern Europe is the FDI inflows.The inflows of these funds are given in Chart 6.
Savings in the Western Balkan countries are still lower than the investment requirements, so the disparity is filled with foreign funds.The expansion of the CA deficit, stimulated by the acceleration of economic activity in the period before the outbreak of the global economic crisis in 2008, was largely financed by FDI inflows as well as foreign loans.However, a significant portion of this inflow was directed to the sectors that produce for the domestic market.As a result, these funds did not significantly affect the productivity growth or the expansion of production for export purposes.Along with the CA deficit increase, the surplus of the financial account in the Western Balkan countries has grown.This generated the tendency for growth of foreign exchange reserves, which doubled in comparison to the usual amounts.For most Western Balkan countries, FDI is the main source of external financing (The World Bank, 2016 p. 9).
Based on the current trends in the international capital market, the impression is that the global growth of interest rates could limit investment, as the interest rates reduce profits.In the countries whose currency depreciates, the burden of servicing the external debt denominated in dollars increases, which discourages the corporate sector from further investment (UNCTAD, 2017, p. 5).Financing the current account deficit in Southeastern European countries Kod većine zemalja ovog regiona registrovan je porast priliva doznaka iz inostranstva (grafikon 7).Ovaj vid deviznog priliva predstavlja važan izvor za finansiranje jednog dela deficita trgovinskog bilansa.Lider među zemljama jugoistočne evrope po prilivu doznaka je Moldavija, a slede je Bosna i Hercegovina, Crna Gora i Srbija.I kod ostalih zemalja ovaj priliv igra značajnu ulogu.To je razlog da se kreiraju podsticajne mere koje bi doprinele da se poveća priliv ovih sredstava i kroz investicionu motivaciju.In most countries in the region, there has been an increase in remittances inflows from abroad (Chart 7).This type of foreign exchange inflow is an important source for financing a part of the trade deficit.Moldova is the leader among the Southeastern European countries according to remittances inflows, followed by Bosnia and Herzegovina, Montenegro and Serbia.In other countries, this inflow plays a significant role.This is the reason to create incentive measures that would contribute to increasing the inflow of these funds through investment motivation.

Conclusion
In the period before the outbreak of the global economic and financial crisis in 2008, the SEE countries have accumulated a high level of external debt, which used to finance the growing CA deficit.With the rise of external indebtedness, the level of debt servicing has also grown, with an increasing proportion of export revenues being channeled for these purposes.The problem of all SEE countries lies in the fact that foreign funds are mainly used to finance the current consumption and production of non-tradable goods.In part, these funds were spent to finance the infrastructure, which prompted the FDI inflows.However, the main factors for stimulating FDI inflows are tax incentives and incentives for new jobs.The external debt of SEE countries has reached a high level with the danger of crossing this limit.The rising CA deficit was interrupted after the outbreak of the global financial crisis, followed by an adjustment in the form of a significant reduction of this deficit relative to GDP.In most SEE countries, this deficit ranged from 0 to 10% of GDP at the end of 2015.With a continuous net inflow of FDI, this amount of CA deficit could be considered sustainable in the medium term.Of course, it is important to get FDIs largely directed into the export sector.After all, the strategy of economic growth should be based on exports.However, the increase in interest rates on the international capital market implies an increase in the burden of debt servicing and less profits in the corporate sector, which can slow down the growth of net FDI inflows.
In that case, the alternative way for financing the CA deficit is the additional external debt.However, this option has already been exhausted for some countries because their external debt is close to 80% of their GDP, the boundary when over-indebtedness becomes unavoidable.These countries cannot afford this luxury, because the transition to a state over-indebtedness exacerbates the conditions of external borrowing, and an increasing part of the foreign exchange inflows is separated prelaskom u stanje prezaduženosti pogoršavaju uslovi spoljnog zaduživanja, a sve veći deo deviznog priliva odvaja se za servisiranje spoljnog duga.U toj situaciji zemlje bi morale da pristupe strukturnom prilagođavanju koje bi podrazumevalo dalju redukciju deficita tekućeg računa i njegovo svođenje u okvire koji su održivi sa stanovišta raspoloživih izvora za njegovo finansiranje.
for the purpose of external debt servicing.In this situation, the countries should undertake a structural adjustment that would imply a further reduction of the CA deficit and bring it back within the borders that are sustainable from the point of view of available resources for its financing.

Figure 2 .
Figure 2. CA balance in the other SEE countries (% of GDP)