East Europe seeks equipment that will contribute to planned goals; U.S. export outlook improves as five-year plans start

Business America, March 17, 1986 by Karen Ware

EAST EUROPE: STAGNANT ECONOMIES PRODUCE MIXED TRADE OUTLOOK Increase in some U.S. exports to Eastern Europe are likely, but the region's purchasing power remains handicapped by weak export performance and hefty debt servicing. The region's $25 billion in hard-currency purchases will not increase this year, but the composition will change as a result of world market price shifts and growing pressure to import technology for modernization. A rise in the U.S. share of this market could result from the lower value of the dollar, as already evident in chemical trade.

As the 1986-90 five-year plans get under way, East European growth rates continue to slow. Bulgaria's growth of net material production hit a 35-year low last year of 1.8 percent and will not increase output growth targets of 2.2 percent for 1986 will not be met. Czechoslovakia and the German Democratic Republic have announced that nearly half of their industries failed to meet output targets for the first half of the year. Hungarian GNP growth is stable at a low 2 percent per year.

The Polish economic recovery of 1983-84 cooled in 1985, with growth of national income slipping below 4 percent per year.

The German Democratic Republic is expected to lead the region with industrial output growth at 4.5 percent this year, but this figure is at a 15-year low. Romania's Five-Year Plan goals of 8 percent per year growth in industry and 6.5 percent in agriculture, though consistent with rates reported in recent years, are unobtainable and misleading.

Although productivity-boosting measures are needed throughout the region, except for Hungary, only anti-alcohol and incentive schemes for workers have been implemented recently. The Hungarian government has undertaken modest tax and banking reforms. Without more effective internal measures, the only way to increase productivity is to modernize plant and equipment. The East Europeans will be in the market to buy Western technology to the extent they can afford it.

Efforts to increase exports, especially to hard-currency areas, will be met with growing frustration through the 1986-90 period.

An effort by the Soviet Union to eliminate trade surpluses with Eastern Euroep will put extra strains on Poland and Bulgaria. In response, Bulgaria is likely to increase hard-currency indebtedness and purchase more from the West. Poland, with its painful long-term debt problem, does not enjoy this option and the internal economy could suffer.

The entire region faces shrinking Third World markets for manufactures, stiffer competition from Far Eastern exports, and a decline in agricultural commodity sales. The goals in Romania's Five-Year Plan of increasing exports by 50 percent are unrealistic, given that the country has been diverting maximum production into exports for the past four years. A mid-year downward revision of Hungarian hard-currency trade projections from an $80 million surplus to a $190 to $220 million deficit may be more indicative of the real extent of export difficulties faced by the whole region.

Except for Poland, Eastern Europe is recovering financially. Bulgaria, Czechoslovakia, the German Democratic Republic, Hungary, and Romania, whose total year-end 1985 debt was $35 billion, have shaved gross hard-currency debt 25 percent since 1980. Lower interest rates have contributed to modest credit expansion in 1986.

Hungary's debt management continues to be exemplary. In May, a syndication of Western banks extended a $275 million loan. Also, a $60 million World Bank credit will be released to Hungary's plastic processing subsector later this year. The Czechoslovak government is negotiating two syndicated $75 to $100 million credits, but there is no indication how these will be utilized. Bulgaria is also rumored to be accepting new loans. The German Democratic Republic is not expected to seek new credits in 1986.

Although Romania is not seeking new credits, it has eased Draconian repayment goals. Western banks agreed in July to reschedule $880 million of debt due in 1986 and 1987. This will permit hard-currency imports to rise.

Poland's debt crisis shows no sign of easing. The authorities have again called their creditors to the table for discussions on further postponing repayment of the $28 billion hard-currency debt. Cooperation with the IMF and World Bank, which Poland recently joined, could provide some direction, but will not solve Poland's economic and financial woes. Several West European governments recently extended new loans in the $10 to $30 million range. Despite the debt, Poland spends two-thirds of its hard-currency earnings on imports.

This year Poland and Czechoslovakia enacted laws permiting large-scale equity joint ventures. Hungary, which permits joint ventures (along with Bulgaria and Romania), considerably liberalized its tax provisions to attract additional investment in key areas. The German Democratic Republic is alone in not allowing foreign equity joint ventures.

The East Europeans look to Western participation in joint ventures as a substitute for borrowed investment capital. They offer, as advantages, cheap, but highly educated, labor--and market access. About 75 Western joint ventures have been formed in the region, all but four in Hungary and Romania.