The countries of Central Eastern Europe are reacting in different ways to the credit crunch. The impact of it all depends on issues such as the size of each country's current account deficit and its level of foreign currency debt.
Some countries are still expected to show GDP growth at levels that, whilst lower than in recent years, would still make Western Europeans envious. The IMF’s revised forecasts for countries across the region range from 5.6 percent in Slovakia and 4.8 percent in Romania to 2.3 percent in Hungary, so Central and Eastern Europe can no longer be seen as a single entity. However, most of the region's banks are owned by Western parents, so they cannot be immune to the reduction in credit that is being seen throughout the world.
In the circumstances, it is too early for private equity fund managers to draw firm conclusions or make forecasts for 2009; there are still too many unknowns. The best response is to make sure that existing portfolio companies take a prudent approach to costs and conserve their cash flows, so that is what we are doing with our companies today.
Since most funds active in the region are denominated in Euros, it is unlikely that many new deals will be signed until the present currency volatility has abated, so although opportunities are there and equity remains a stable source of capital for businesses, we are adopting a cautious approach.
Is the industry changing? I doubt it in the long term. We have invested and exited through several cycles and every time people say “this one is different”. Of course this is partly true because each downturn or crisis is brought about by different factors, but the constant is that every cycle turns – eventually.
Joanna James is a managing director of Advent International's Central and Eastern Europe activities.