FINANCING THE CURRENT ACCOUNT DEFICIT IN SOUTHEASTERN EUROPEAN COUNTRIES

Scientific review article
Autor: Radovan Kovačević
JEL: F21, F24, F32, F34, F39
doi: 10.5937/bankarstvo1703096K
SCINDEX

Summary: The inflows of foreign capital to the Southeastern Europe (SEE) countries before the outbreak of the global financial crisis in 2008 supported the growth of domestic demand, which was partially satisfied by imports. This conditioned the growth of the current account (CA) deficit. The liberalization of foreign trade has facilitated imports and contributed to the growth of the trade deficit. The capital inflows into these countries have been increased as a result of the low interest rates as well as the increased amounts of available global liquidity. Strong domestic demand has generated high rates of economic growth. However, a significant increase in prices and wages, primarily due to the expected convergence of income, weakened the sector of tradable goods in these countries. The result has been a high increase in external debt, which could adversely affect debt servicing capacities, and weaken the competitiveness of the economy. The mitigating circumstance for these countries is the significant net inflow of foreign direct investment (FDI), as an important channel of financing the CA deficit. The countries of the region have made adjustments after the outbreak of the global economic and financial crisis, with the accompanying reduction in the CA deficit. However, the main direction for financing a sustainable CA deficit is to increase export competitiveness and export revenues. In this way, the trade deficit would be reduced, and the CA deficit may become sustainable. The FDI net inflow is an additional source of financing the deficit, which mitigates the burden of external indebtedness. However, even with this type of capital inflow, one must bear in mind the possibility of repatriation of profit and, eventually, withdrawal of capital, which could make it difficult to finance the CA deficit.

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