Foreign investment has added over 15% to Poland’s GDP

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Croatia has the lowest share of FDI in public debt

Austrian EVN puts on hold plans for hydropower project close in Bulgaria

Poland by Marek Pielach

Poland’s GDP would be 15.6 per cent smaller in 2015, if not for foreign direct investment. The real benefits include higher competitiveness of the economy, higher incomes of the citizens and higher budget revenues. The impact of these investments on sectors other than production is a positive surprise.

“…we estimate that potential GDP increased by an annual average of 0.7 per cent over the years 1991-2015 thanks to the inflow of FDI. As a result, thanks to the capital invested in Poland and the activity of international corporations, GDP in 2015 was 15.6 per cent higher than in a scenario where the value of FDI had remained at 1991 levels,” the think-tank Polityka Insight writes in its report. The study was carried out at the initiative of 14 international chambers of commerce.

Over the past 25 years (until 2015) FDI in Poland amounted to a total of over EUR168.2bn. This corresponded to 39.6 per cent of the GDP. On average there was an inflow of EUR6.1bn per year.

In 2016, the inflow of foreign direct investment to Poland accelerated once again. The value of completed investment projects supported by the Polish Investment and Trade Agency increased from EUR800m in 2015 to EUR1.7bn last year. The authors of the report estimate that in 2016 the value of all foreign direct investment flowing into Poland exceeded EUR11.8bn.

The largest foreign investors were Germany (19.1 per cent of the total value of investment), followed by the United States (10.9 per cent) and France (10.8 per cent). Other significant investors included the United Kingdom (6.2 per cent), Italy (5.7 per cent) and the Scandinavian countries (5.3 per cent). In total companies with foreign capital employ one-third of all workers in Poland and are responsible for two-thirds of exports.

The largest percentage of the funds (32 per cent) was absorbed by manufacturing, but this seemingly wasn’t particularly profitable, since this sector was only responsible for 17 per cent of GDP growth through investment. In terms of the value of the inflow of funds, second place was taken by financial services with a 19 per cent share, which accounted for 13 per cent of GDP growth. Third place was taken by trade, with a 16 per cent share in the value of FDI inflow.

One explanation for the fact that trade is the sector which has the largest share in GDP growth – 19 per cent – could be the chronology of the inflow of foreign funds. Industrial investments were the most popular immediately after the fall of the Polish People’s Republic. After Poland’s accession to the European Union funds flowed to the service industry, and currently most investors are gravitating towards financial companies, trade companies, and once again industrial companies, but this time this increasingly involves the so-called Industry 4.0 – much more innovative than its counterpart from a quarter of a century ago.

According to the authors of the report, foreign investments have practically no drawbacks. Enterprises that were taken over by foreign owners increased added value every year at a rate 2.2 percentage points faster than other companies, but even their contractors, customers and suppliers profited to a greater or lesser degree.

“The inflow of FDI is one of the most important factors stimulating demand in the economy. If the investor intends to build a factory he will need to acquire building materials, pay local companies for its construction and buy proper machinery,” the authors explain.

The inflow of foreign direct investment also had a positive effect on the labor market: employment increased by 8.5 per cent, wages by 8.9 per cent, and income inequality decreased by nearly 5 per cent.

The state budget has also profited – thanks to foreign investment, tax revenues increased by an average of 2.7 per cent per year, and the tax base by 10 to 12 per cent over the quarter of a century. International corporations have recently been responsible for more than 30 per cent of the revenue from corporate income tax.

Recent data are generally positive for Poland. In 2016, more than EUR11.8bn in direct investment flowed into Poland, which will create 16 thousand new jobs. The Polish Investment and Trade Agency itself handled investments worth EUR401.5m last year, 60 per cent of which were investments of companies already present in Poland. In 2015, all foreign investors reinvested EUR7.2bn in Poland and paid out EUR6.8bn in the form of dividends.

“The Polish State appreciates all the initiatives and projects of foreign investors, but especially needs and supports those investments which create high-paying specialized jobs, which are located also outside major cities, which create research and development centers, which build bridges between science and business,” wrote the Deputy Prime Minister and Minister of Economic Development and Finance Mateusz Morawiecki in a letter that was read out before the presentation of the report at the Ministry of Development.

CSE by Łukasz Czernicki

Among the so-called new member states of the European Union remaining outside the Eurozone, the share of FDI in the public debt is the highest in Poland. This poses a certain risk for financial stability.

In December 2016, the share of foreign investors in the debt of the Polish State Treasury amounted to 53.4 per cent. At the end of the third quarter of the year, among the countries of the former Communist bloc currently belonging to the European Union but remaining outside the Eurozone, the smallest percentage of the public debt held by non-residents was recorded in Croatia – a little over 38 per cent, and in the Czech Republic – 42.4 per cent. The largest share, recorded in Poland and Romania, amounted to 54.3 per cent and 53.6 per cent, respectively. Bulgaria and Hungary were ranked in the middle of the list.

The high share of non-residents in the public debt represents a certain risk to the financial stability of a given economy. The large scale sale of government debt securities by foreign investors and the withdrawal of capital abroad could launch a self-reinforcing mechanism involving a rapidly falling exchange rate of the local currency and dynamically increasing yields on government bonds.

Bulgaria by Jo Harper

Austrian energy company EVN has put on hold plans to build a EUR350m Bulgarian hydropower project close to the border with Turkey. EVN has a 70 per cent stake in the long-delayed project comprising three hydropower stations and renovation of existing dams on the Gorna Arda river. Bulgaria’s state electricity company NEK holds the other 30 per cent. “Due to changes in the energy policy environment in Bulgaria, the Gorna Arda hydropower plant project was put on hold because its realization is not possible under the current circumstances,” EVN said in its first-quarter earnings report.

Bulgarian energy experts say that low electricity prices, as well as the unwillingness of the Balkan country to ensure long-term contracts for the purchase of power from the project, were the likely reasons for the company’s decision. The Gorna Arda project had expected capacity of 175 megawatts and was part of an energy deal between Bulgaria and Turkey, signed in 1998. It was initially to be built by Turkey’s CCG, part of the Ceylan conglomerate. “Impairment losses of EUR28.9m were therefore recognized during the reporting period,” according to EVN.

The project involved developing the Gorna Arda water cascade, which includes three new hydropower stations totaling 175 MW, and rehabilitation of three existing hydropower stations. Work on the existing stations, which total 274 MW, was expected to cost about EUR32m.

In January, HydroWorld.com reported that the European Bank for Reconstruction and Development (EBRD) would support EUR37m in costs for rehabilitation projects at the Belmeken-Sestrimo-Chaira hydro complex and Vacha-1 hydropower facility in Bulgaria.

Gorna Arda hydro power plant was a joint project of EVN and Bulgarian National Electricity Company (NEK). Its construction would have brought Bulgaria closer to its national target of 16 per cent energy gained from renewable sources by the year 2020. Hydro Power Company Gorna Arda was established in 1999 by NEK and the Turkish Ceylan Holding. It was established after the signing of an intergovernmental agreement between Bulgaria and Turkey.

EVN started collaborating with NEK on this project in 2010. The project included construction of facilities with total capacity of 170 MW and annual electricity production of 350 GWh, which would cover the energy needs of 100,000 households.

On February, EVN and NEK reached an agreement to settle a debt worth EUR98.2m. The settled amount remained undisclosed, but EVN report says that the settlement increased the company’s net revenue by EUR38m. EVN – which controls an electricity power distributor in southeastern Bulgaria – recently reached an out-of-court agreement over payment disputes with debt-ridden Bulgarian energy provider NE. The company said, however, that arbitration proceedings against Bulgaria over electricity pricing, filed in 2013, will not be withdrawn.

Bulgaria has taken steps to liberalize its energy market and set up a day-ahead power exchange, but still regulates household electricity prices, which are a politically sensitive issue in the EU’s poorest member.

What’s up in indexes

BET (of Bucharest) was closed Monday, May 1st. It increased from 8,179.41 index points Thursday, April 27th to 8,230.46 index points Friday, April 28th. It’s up 0.62 per cent d/d and up 25.59 per cent y/y.

BUX (of Budapest) was closed Monday, May 1st. It decreased from 32,959.62 index points Thursday, April 27th to 32,956.30 index points Friday, April 28th. It’s down 0.01 per cent d/d and up 22.78 per cent y/y.

CROBEX (of Zagreb) was closed Monday, May 1st. It increased from 1,888.86 index points Thursday, April 27th to 1,901.87 index points Friday, April 28th. It’s up 0.69 per cent d/d and up 15.98 per cent y/y.

OMXR (of Riga) was closed Monday, May 1st. It decreased from 824.47 index points Thursday, April 27th to 814.55 index points Friday, April 28th. It’s down 1.20 per cent d/d and up 30.02 per cent y/y.

OMXT (of Tallinn) was closed Monday, May 1st. It increased from 1,123.49 index points Thursday, April 27th to 1,124.39 index points Friday, April 28th. It’s up 0.08 per cent d/d and up 13.59 per cent y/y.

OMXV (of Vilnius) was closed Monday, May 1st. It increased from 578.20 index points Thursday, April 27th to 579.73 index points Friday, April 28th. It’s up 0.26 per cent d/d and up 15.06 per cent y/y.

PX (of Prague) was closed Monday, May 1st. It increased from 1,002.12 index points Thursday, April 27th to 1,007.87 index points Friday, April 28th. It’s up 0.57 per cent d/d and up 10.88 per cent from year-end.

SAX (of Bratislava) was closed Monday, May 1st. It decreased from 312.96 index points Thursday, April 27th to 312.44 index points Friday, April 28th. It’s down 0.17 per cent d/d and down 4.94 from year-end.

SOFIX (of Sofia) was closed Monday, May 1st. It increased from 649.47 index points Thursday, April 27th to 657.29 index points Friday, April 28th. It’s up 1.20 per cent d/d and up 48.51 per cent y/y.

UX (of Kyiv) was closed Monday, May 1st. It increased from 1,011.41 index points Thursday, April 27th to 1,021.91 index points Friday, April 28th. It’s up 1.04 per cent d/d and up 60.02 per cent y/y.

WIG20 (of Warsaw) was closed Monday, May 1st. It decreased from 2,380.48 index points Thursday, April 27th to 2,376.87 index points Friday, April 28th. It’s down 0.25 per cent d/d and up 25.23 per cent y/y.

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