South East European countries improve their interaction by signing bilateral free trade agreements and establishing a regional energy market, according to the Southeast Europe Investment Guide 2006 published by the Bulgaria Economic Forum.

Challenges in the region are still related to further improvement of the investment climate, fostering investments, restructuring the political and legal sectors, and public administration, by encouraging growth and stability. The region has a clear aim - integration into the European Union, a strong impetus for the countries in it. The main advantages of the region as an investment destination are the huge markets, highly qualified labour force, good performance and competitive prices, willingness to improve infrastructure, agreements on investments protection and bilateral agreements aimed at avoiding double taxation.

According to the Southeast Europe Investment Guide 2006, direct foreign investment in the region reached a historic record of over 14 billion euro in 2004 and nearly 20 billion euro in 2005, reports of these countries' central banks showed.

The total amount of foreign investment in the region was approximately 60 billion euro for the period 2001-2005, marking a threefold increase compared to the previous five-year period.

Although the levels are relatively low on a global scale, the countries in South East Europe are strong players when it comes to attracting foreign direct investments.

The average proportion for the 11 countries in the region went up to four per cent of the gross domestic product (GDP) in 2004, making FDI a major source of growth.

The FDP to GDP ratios show that Bulgaria and Croatia have been the absolute leaders for the past 10 years. Bulgaria tops the ranking in terms of incoming foreign capital (7.2 per cent of GDP in 1996-2005) and Croatia leads in terms of FDI with more than 2413 euro per capita for the same period.

The process of EU integration provoked investor interest in Bulgaria and Romania in 2003 and 2004, when the two countries reported record-high foreign investments. The start of negotiations with Turkey and Croatia will lead to growing foreign capital in both countries, but the total effect will be much more evident in Turkey, where several large privatisation deals dominate the official statistics for 2005 and 2006.

Current privatisation deals are important for Serbia-Montenegro, where the share of foreign investment in GDP in 2005 was the highest one, although the country is still far from a pre-accession process. Despite the weak economic base and the significant losses suffered because of past political turmoil, Serbia-Montenegro has a chance to report an increasing direct foreign investment to GDP ratio in the coming years.

In the meantime, Bulgaria, Romania and Croatia will keep profiting by their European perspectives, even though direct foreign investments may not play as big a role as the European funds will.

The influx of foreign investment in the South East European countries as a percentage of GDP was 4.02 on the average in 2004, although it varied in each country - from 10.9 per cent in Bulgaria to 0.3 per cent in Moldova.

Bulgaria reported a significant growth in FDI in 2004 mainly due to investment deals in the energy sector (the privatisation of electricity distribution companies) and the telecommunications branch (the privatisation of the Bulgarian Telecommunications Company and the additional investments of the second GSM operator, GloBul).

Again in 2004, Romania attracted a record-high investment worth 4.2 billion euro. It distinguished itself from the other transition economies by the large number of companies with foreign shareholders and the high concentration of foreign companies in the industry.

Bosnia and Herzegovina also reported record-high foreign investments in 2004, reaching 618.3 million euro as a result of several big privatisation deals, mostly in the production and banking sectors.

Along with the positive trends, there are still risks in these countries that affect the commodity market - for example, the high oil prices and the growing competition by Asian countries. Although all countries in South East Europe are oil importers and have significant trade imbalances because of the expensive import, their economic growth is not yet in danger.

While the oil shock will certainly have some effect on the GDP, it is difficult to say how it will affect the commodity markets. On one hand, all energy companies make profit by the growing prices in the sector and the oil market seems a short-term pushing factor for all exchanges. On the other hand, the long-term effect may be quite negative, since energy-dependant sectors suffer great losses because of the high oil prices, thus pulling down the entire economy.

The investment climate can be measured by the export-GDP proportion. High levels on this indicator are precondition for accelerated growth and competitive power of the economy.

In South East European countries, the deviation of the indicator is considerable, varying from about 50 per cent for Croatia, Macedonia and Slovenia to 20 per cent for Turkey, which is expected to make further efforts to have its export amount increased.

Transport equipment, refined oil products and chemical production are the main goods exported by Croatia, whose major trade partners in 2004 were Bosnia and Herzegovina, Germany and Italy. The commodities produced, food, drinks and tobacco were key export sectors for Macedonia, which had as main partners Germany, Greece and Serbia-Montenegro. Slovenia exported mainly car engines and medicines to its main partners, Germany and Italy. The availability of an efficient and accessible infrastructure and a regulating framework is a key precondition for attracting foreign and domestic investments.

Even though governments in South East Europe try to stimulate restructuring and investing in the infrastructure, there is still more to be done for improvement in that aspect. Bulgaria, Croatia, Greece, Romania and Slovenia have achieved significant progress so far, while Bosnia and Herzegovina and Macedonia must make more efforts in this direction.