TRANSITION REPORT 2014 Innovation in Transition

Energy

The last few years have been difficult for energy markets in the EBRD region. While some countries have announced reforms, progress with implementation has been slow. In some cases, reforms have even been reversed, leading to six downgrades in the electric power sector in the past two years. With only one downgrade and one upgrade, 2014 may mark a turning point for this sector. However, it is too early to say with certainty, particularly given the increase in energy-related challenges in the region, not least because of the crisis in Ukraine.

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Infrastructure

There have been a number of positive developments in the area of infrastructure, leading to three upgrades in the Slovak Republic and Moldova. However, Hungary’s increasingly state-oriented and non-commercial approach to economic policy has had a negative effect on the water and wastewater sector, leading to a downgrade. In addition, Bulgaria has been downgraded in regard to urban transport, mainly owing to a number of municipalities returning to providing bus services without private sector involvement.

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Financial sectors

While last year’s observation that financial sector reforms had proven resilient still holds true, there are some notable exceptions, with three downgrades in the banking sector this year compared with none last year. The difficult economic and socio-political environment has also revealed a number of structural challenges in the micro, small and medium-sized enterprise (MSME), private equity and capital market sectors. However, some improvements have also been observed – particularly in the MSME sector, where improved access to finance for SMEs has triggered a number of upgrades.

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Corporate sectors

Progress in the corporate sector continues to be mixed, with both positive and negative developments in the transition region. This year there have been two downgrades and one upgrade.

In general industry, the market institutions gap in Bulgaria has widened from small to medium, reflecting the ongoing deterioration in the business environment. Although foreign firms – manufacturers of automotive parts, for example – continue to show interest in Bulgaria, the weak economic growth in recent years, combined with political turbulence, has led to low levels of both foreign direct investment and domestic investment. The political interference seen in the electric power sector (which was downgraded last year), combined with low feed-in tariffs, is having a significant effect on the corporate sector by discouraging investments in resource efficiency.

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Cyprus

Cyprus became an EBRD recipient country in May 2014, so this is the first time that it has been included in this annual assessment of structural reform progress. Despite being an EU member state and relatively advanced in certain sectors, the country faces major challenges in a few very specific areas – particularly in the financial and infrastructure sectors. In these two sectors, its scores range from 3- to 3+. The key challenges in the financial sector span most of the banking industry, with a very high NPL ratio of around 50 per cent, low levels of funding and a need to push through further restructuring. These problems are restricting companies’ access to finance, particularly in the case of SMEs, while alternative financial products are not readily available in the market. In the infrastructure sector, wider private-sector participation – for example via PPPs and the introduction of performance-based contracts – remain a challenge. In the corporate sector, market structures and institutions appear to be more robust, particularly in the general industry and the ICT sectors, which have scores of at least 4-. However, specific challenges relating to privatisation and corporate restructuring remain.