Poland needs foreign capital

RAMOTOWSKI Poland needs foreign capital jamnik

As long as the amount of national savings is not high enough to raise the rate of investment, Poland will be using foreign investment.

Their inflow may improve the negative international investment position, as foreign direct investment has a large contribution to Polish exports. But all countries compete for capital. Especially for high-quality capital associated with direct investment, which is difficult to withdraw, and even more for the one which participates in greenfield investments. Poland has the opportunity to attract more and more such investments, because its perceived attractiveness by foreign long-term investors has continued to grow for three consecutive years.

World map of investment

Greenfield investments are the most advantageous in terms of gaining stable capital. According to the last fDi Intelligence report Poland, with 272 projects declared in 2016, ranked the fifth in Europe. The number of projects increased by as much as 36 per cent compared to the previous year. In terms of the value of declared capital investments – it was USD9.9bn – Poland was the fifth after the United Kingdom, France, Russia and Germany. Worldwide, the greenfield investment market grew by more than 6 per cent to USD776.2bn.

Although last year’s growth, after a few years of post-crisis stagnation, was not impressive, the map of greenfield investment in Europe has changed rapidly. Latvia, for example, recorded an increase in new investment projects of 44 per cent, and Estonia as much as 60 per cent. Recovering after a long recession, the Spanish economy has absorbed 324 investment projects, an increase of 28 per cent year by year. The largest beneficiary was France, where the value of capital investment increased by 54 per cent. Britain was the biggest loser due to uncertainty caused by Brexit.

This year, along with the acceleration of global growth and the increase in international Monetary Fund forecasts in April, the cross-border direct greenfield investment is projected to increase by 10 per cent – estimates the UN-UNCTAD agenda.

In the opinion of foreign investors, the most attractive region for investment is Western Europe (58 per cent of indications). Central and Southeast Europe (CSE) ranks as the third, giving up just a little bit to North America and going head to head with China – shows the EY survey conducted on a sample of 505 decision makers in international companies. In our region, Poland has the most indications.

What do foreign investors value most in Poland? Contrary to what one might expect, not low labor costs – as this factor is only mentioned in the third place. Local workforce skills are valued most (81 per cent), followed by potential of productivity growth (78 per cent). Nearly half (48 per cent) of respondents believe that Poland’s attractiveness as a location for investment over the next three years will increase, while only 20 per cent think otherwise.

These results represent a significant improvement over the previous year, when the growth of Poland’s investment attractiveness in the horizon of three years was predicted by less than one third of the decision makers, and the drop by almost a quarter.

A strong improvement in ratings is a trend behind which decisions are made. Over the last three years, the number of foreign investment projects announced in Poland has grown rapidly. In the years 2004-2013, foreign investors announced in our country an average of 142 projects a year, and in the years 2014-2016 this number has increased on average to 200, which means an increase of 40 per cent, the largest in the region.

Efficiency of capital allocation matters

All in all, Poland’s investment attractiveness is assessed to be the highest in the group of several EU Member States, after Portugal and the Netherlands, which attracted the most of foreign investment last year. However, it is not investments alone that matter but also the return on invested capital.

„The quality of capital and behavior of investors are crucial for growth,” said Vazil Hudak, vice-president of the European Investment Bank.

Polish society is aging, the average age of employees is growing rapidly, and the demographic situation is conducive to shrinking labor resources. That is why the times when Poland could attract investment using cheap labor resources are over. More capital-intensive investment is needed – that is, the one of the highest quality.

The rate of investment in the Polish economy is very low, even against the background of the region. On average, in the years 2004-2016 it was 20.2 per cent of GDP, while in other CSE countries – 24.6 per cent. The government „Responsible Development Strategy” presents a conviction that in order to catch up with more developed economies, Poland needs to increase its investment rate to 25 per cent of GDP per year. The gap of 5 per cent of GDP per year is almost EUR23.6bn

The Strategy draws attention to the negative IIP, which is the long-term sum of current account deficits, and concludes that the way for it not to get deeper is to build national savings. Realistically, however, it takes many years for national savings to replace, in part, the benefits of the inflow of foreign capital.

Poland’s central bank, NBP data show in turn that although Poland’s IIP is negative (at the end of 2015 it was 62.8 per cent of GDP, when a level up to minus 35 per cent in relation to GDP is considered „safe”), but its structure is favorable. Because FDI accounts for as much as 43.2 per cent of total foreign liabilities, amounting to nearly EUR472.4bn by the end of 2015.

NBP reports that Poland’s net external debt is 35.7 per cent of GDP, and therefore is much lower than IIP to GDP ratio. „This confirms a favorable structure of the international investment position for Poland, where equity and other forms of equity interests acquired by non-residents in direct investment are significant on the liabilities side,” the report said. Moreover, the figures show that in 2015, EUR7.3bn, i.e. 1.7 per cent of GDP, from the profits of foreign investors has been reinvested.

“Improvements in the IIP are possible thanks to the expansion of companies’ businesses and lowering of import intensity,” said Marcin Mrowiec, chief economist at Bank Pekao.

What do foreign investments give

The surplus in trade reduces the effect of other items that constitute a negative current account balance. In 2015 Poland’s negative IIP decreased by 5.5 pp. This was mainly due to the fall in the valuation of listed shares held by foreign investors, but not only. And both in 2015 and 2016 Polish foreign trade recorded a surplus – last year it was already significant EUR4.8bn, so over 1 per cent of GDP.

NBP studies show that the development of Poland from the beginning of the transformation consisted in joining and then moving upwards in the global value chain (GVC). The economy has been importing technologies and building exports at the same time.

“Since the outbreak of the crisis as much as 80 per cent of economic growth in Poland has been connected with the GVC,” said Jan Hagemejer, head of the Structural Analysis Division at NBP.

At the same time, foreign demand for added value generated in Poland increased throughout the period of transformation. In 2016, this demand generated around 35 per cent of added value produced in Poland, which represents an increase of 15 pp over the last 16 years – the EY study shows.

By satisfying the growing foreign demand for added value, the Polish economy is moving at the same time in the GVC chain, and this is thanks to exports. Meanwhile, the strength of exports from Poland is determined by foreign capital invested in Poland, which generates two thirds of all Polish exports. Moreover, the share of added value is much higher in the exports of Polish companies with foreign capital, than the ones with Polish capital.

“The export and generating of added value in Poland is very high. It is higher than in Germany, and it is second highest in the world after the Netherlands. Added value in foreign companies is 50 per cent higher than in domestic ones,” said Marek Rozkrut, EY chief economist.

Moreover, this fact directly translates into employment. Companies operating in the country which carry out exports have recorded employment growth in recent years. In manufacturing, „presence in foreign markets translates into growth and employment, and activity limited only to domestic sales is currently associated with a reduction in staff numbers and weaker financial results,” states NBP in the report on the situation of enterprises in Q3’16.

Not only does FDI have a positive impact on the structure of the IIP but, insofar as it is of high quality and translates into high added value exports, paradoxically reduces its negative value.

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