* Surge in portfolio investments boosting CEE assets
* Investors differentiating -- bullish on Poland and Czechs
* Policymakers, CEOs to discuss at Oct. 11-13 Reuters Summit
By Michael Winfrey
Economics Correspondent, Central Europe and the Balkans
PRAGUE, Oct 8 (Reuters) - A surge in portfolio inflows is
flooding into emerging central Europe, although yield-hungry
investors are picking solid policy and higher growth over
countries still struggling to put the crisis behind them.
After deep contractions across the region, a two-speed
recovery is underway, with countries boasting better debt
fundamentals like Poland and the Czech Republic for the moment
ahead of those who depend on foreign lending.
Investors are also dipping into countries like Hungary, but
struggles by the new centre-right Fidesz government to get its
budget deficit under control mean it is lagging for now, along
with fellow International Monetary Fund benefactor Romania.
"There has... been clear differentiation between the more
robust and the weaker economies of the region," Goldman Sachs
wrote in a research note on the region.
"We believe that the region's stronger economies -- namely,
Poland, Turkey, Israel and the Czech Republic -- will be the
first to see an acceleration in financial inflows both
in debt and, increasingly, equity." Turkey and Israel are often
grouped with emerging European markets.
Extremely easy monetary policy in the world's developing
economies, including expectations the Fed will push ahead with
more asset-buying, plus continued worries over debt in troubled
euro zone countries like Greece and Ireland have helped push
investors into these higher-yielding countries.
But these new, more volatile, portfolio flows carry risks.
Having supplanted the greenfield projects, reinvested
dividends, and bank lending that fuelled export and consumer
spending booms earlier this decade, they are more exposed to
selloffs in the event of a Lehman-style global shock, which
wiped 30 percent off the zloty's value versus the euro.
Regional pressures, from budget battles to whether Germany's
exports will continue to fuel recovery, will also weigh.
More than a dozen policymakers, bankers and corporate
officials will discuss this and other issues at the Reuters
Central European Investment Summit in exclusive interviews in
Vienna, Warsaw, London and New York from Sept. 11 to Sept. 13.
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Graphic on emerging Europe: http://r.reuters.com/kyk47p
For a factbox on investment flows, click []
For a factbox on main risks in central Europe: []
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FLOWS, RISKS
With slower growth and hard-to-escape ties to the EU's
ailing periphery, Emerging Europe has lagged Asia and Latin
America in luring investors, but that has picked up since July.
According to the Institute of International Finance, capital
flows to Emerging Europe, including Turkey and Russia, are
likely to triple to $180 billion this year, even if they remain
at a third lower than the 2004-2008 average.
Boosted by the victory of an austerity-minded government and
low national debt, the Czech crown has led the region since
July, rising 7.4 percent versus the euro. Poland's zloty has
climbed 4.28 percent and Warsaw's WIG index 12 percent.
Hungary has benefitted too, despite concerns that the
government is not matching its promises on reducing the deficit
with appropriate policy measures. The forint has jumped 4.5
percent since July, and its .BUX index has jumped 13 percent.
"The lower risk profile of our region relative to others,
such as peripheral European countries, is making the asset class
a more mainstream investment option," said Marcin Fiejka, Senior
Portfolio Manager, Pioneer Funds - Emerging Europe and
Mediterranean Equity.
Romania, which is struggling to sell bonds at yields under a
self-imposed 7 percent ceiling, is fighting public discontent
and a combative opposition to push through an austerity plan key
to keeping its own IMF aid programme on track.
Ahead of an autumn, 2011 election, Poland's government is
eschewing austerity and a sharp worsening in its forecasts for
the broad public sector deficit this year could push it past
constitutional debt safeguards.
But it is expected to grow up to 3.5 percent this year and
its central bank expected to raise interest rates from its
current 3.5 percent -- well over western levels.
The industry-heavy Czech Republic is expected to grow 1.6
percent this year and 2.3 percent in 2011, although like
Slovakia and Hungary its recovery is heavily dependent on its
main export market Germany. Its centre-right government also
aims to balance the budget by 2016 if growth allows.
A Reuters poll this week showed analysts expect the zloty to
firm 4.4 percent in the next 12 months, and the Czech crown 0.9
percent. But the forint, buffeted by conflicting signals from
Fidesz, was seen weakening 2.4 percent. []
"You've got have a reason to think you're going to do
significantly better than G4 (developed) economies on a
sustained basis," said Barclays Capital analyst Koon Chow.
"I think Poland and Czech can do it. Hungary and Romania,
I'm not sure they can."
(Additional reporting by Sebastian Tong; editing by Patrick
Graham)
