Automotive deals, export growth accelerate economy in 1995
Two years later, however, Poland has moved into the spotlight as Europe's fastest-growing economy, thanks in great measure to the depth of early reforms. GDP in 1995 grew at an impressive 6.5%, exceeding the government's own expectations. Exports surged by more than 20% in real terms, and industrial output was up 14% compared to 1994. Foreign investment exceeded $2 billion last year, 35% of the total amount of foreign investments in Poland since 1990, according to the State Agency for Foreign Investment.
While 1995 was Poland's day in the sun, analysts say that to maintain momentum government officials must make some politically tough decisions, especially in the area of social welfare reform and privatization of 'sensitive industries.'
"Right now is the time to be here, but then it will be someone else's turn," said Leslaw Paga, chairman of Deloitte & Touche Group Poland and former president of the Securities Commission. "It's a question of a crossroads - on the one side we have this fascinating growth, and on the other side are reforms waiting.
"This year gave us a lot of positive things - people may now think that things are possible. It would be nice if Poland could utilize its five minutes."
In 1995, the auto sector was Poland's cash cow. An estimated $2.5 billion was promised by foreign auto makers vying for domestic market share in bids for local production sites to buck price-prohibitive duties. But industry observers expect outside investments in the sector to slow in 1996.
"In terms of manufacturing, I think things are going to go a little quiet now," says Rodney Joyce, an independent automotive consultant in London. He said the attraction of producing a foreign car in Poland is access to the growing number of car buyers. But production plans of local producers like Fiat, Daewoo and General Motors suggest that domestic demand will be met by the current players, leaving little room for newcomers with big plans.
"It's already getting a bit crowded," Joyce says.
The big deal
South Korea's Daewoo Corporation led the pack with an aggressive spending spree culminating in November with a $1.12 billion promised investment in the ailing Fabryka Samochodow Osobowych (FSO) plant.
The deal paved the way for a production target of 220,000 Daewoo cars over the next five years. The assembly of the mid-size Espero is set to begin this year with a projected annual output of 20,000 units. As part of the agreement, 60%-80% of the parts used in manufacturing any new model will be produced in Poland. The Daewoo Corporation now owns 70% of the shares in Daewoo-FSO Motors with the remaining 30% split between the Finance Ministry and FSO employees.
General Motors Poland made moves towards a $587 million greenfield investment. GM plans to build 100,000 Polish-made compact Opel Astras to heat up the low-priced, economy-car market. GM took the greenfield route after Daewoo squeezed it out of a production deal with FSO last summer. Experts see GM's plans to stay in Poland as a clear indication of the long-term viability of the country's car market.
The mega Daewoo-FSO purchase was only part of the South Korean auto maker's investment portfolio last year. In October, Daewoo Motors grabbed a 61% stake in Fabryka Samochodow w Lublinie (FSL), a light-truck factory. The price tag was set at $340 million, but President Tae Goo Kim of Daewoo Motors hinted at an increase in the Daewoo investment.
In two eleventh-hour deals signed by the Privatization Ministry, Poland's largest tire producers went into private hands on the same day. A 52.1% stake in Stomil-Olsztyn was grabbed by Michelin for $110 million. The French tire company promised an additional $150 million capital investment over the next four years.
Goodyear Rubber and Tire Co. bought a 32.7% stake in Poland's strongest tire maker Debica for $55 million. An additional $60 million was promised for the purchase of shares to gain a 57% majority. But as the Christmas holiday began, private shareholders threatened to scuttle the majority share purchase. The Finance Ministry originally gave the nod for the tire giant to buy additional shares at zl. 28 ($11.90) per share, a 33% discount from the zl. 40 ($16.30) market price. To make the purchase Goodyear needed approval from four out of every five Debica shareholders. Shareholders, mostly UK-based fund managers, did not want the value of their holdings diluted. They stood strong.
"It was the principle of the thing. The government shouldn't be allowed to sell at one price and the other shareholders at a lower price," said Frances Cloud of Nomura Equity Research in London.
Debica shareholders voted to approve the purchase, but Goodyear didn't get the bargain it was promised by the government. Goodyear settled for a 51% majority with a $60 million price tag.
Exports fuel growth
While planned investment in the automotive industry and related sectors, like parts and components manufacturing and retail gas outlets, received a good deal of attention in 1995, dynamic economic growth was a result of a general upswing in exports. Although that trend began to slow in the second half of the year due to the zloty's appreciation and declining demand in Germany, exports still rose by almost 18% in real terms.
The engine for this growth was the private sector, with over 200,000 companies now selling their goods abroad, compared with around 200 in 1990. Germany remains Poland's main trading partner, and almost 75% of Polish exports now go to European Union countries as compared with 29% in 1988.
Much of the trade is legal, but unregistered, cross-border trade that the International Monetary Fund estimates to be worth as much as $6 billion. Were this trade to be taken into account, Poland would have a trade surplus of around zl. 2 billion ($830 million). This led to an increase in official foreign currency reserves, now at more than $13 billion, compared with $6 billion at the end of 1994.
Because of the dynamic growth of reserves, the National Bank of Poland was faced with some tough monetary policy issues. If the NBP continued with the current mechanism - a floating peg devalued every month by 1.2% - money supply would continue to grow as the bank printed more money to drain foreign currencies from the market, leading to inflation.
A change in the mechanism, however, would mean an appreciation of the currency, and that would make Polish exports less competitive abroad. The NBP finally opted in late December for a one-off, 6% upward revaluation of the central parity rate.
Profitability and privatization
The improved economy was mirrored in the financial standing of companies. While Darwinistic market mechanisms continue to push the weak out of the market, in 1995 profitability figures for companies were the highest since the initiation of market reforms five years ago. Pre-tax earnings margins were at 5%, with 2% net profit margins.
The highest margins were in telecommunications (over 17% net) and manufacturing (around 6%).
In addition, companies were plowing earnings back into their businesses, as investment in industry increased by 44% in the first three quarters of 1995 in relation to the same period in 1994. The largest increases in investments were in food processing, leather products and paper and pulp. Investment outlays in transportation increased most dynamically, followed by investment in machinery and equipment.
Management of companies is also improving as accidental entrepreneurs learn the ropes of the market economy, analysts say.
"The businesses are better now," said Jacek Witak, a partner at venture capital group Renaissance Partners. "The companies we see now are more interesting in terms of sound business, aggressive growth and good strategies."
While privatization has slowed down somewhat, 1995 did see the start up of Poland's Mass Privatization Program after several years' delay, which has caught the eye of the international financial community for the opportunities it offers.
More than just a transfer of ownership through mass distribution of shares in state-owned enterprises like in the Czech Republic, the Polish program combines an element of management to the program. Fifteen National Investment Funds (NIFs) managed by international and domestic companies, have 33% lead shareholding in 29 companies, giving them effective control.
Their task is to provide professional advice and access to capital, and their pay is tied to the increase in the value of their fund, an incentive to helping companies grow and making them competitive.
The program will have an impact on capital markets through new securities in the form of participation certificates distributed at a token cost to the general public. The certificate can be exchanged for one share in each of the fifteen NIFs once they are listed on the Warsaw Stock Exchange, possibly by year's end, and many analysts say certificates are likely worth four times their price.
While 1995 was Poland's day in the sun, analysts say that to maintain momentum government officials must make some politically tough decisions, especially in the area of social welfare reform and privatization of 'sensitive industries.'
"Right now is the time to be here, but then it will be someone else's turn," said Leslaw Paga, chairman of Deloitte & Touche Group Poland and former president of the Securities Commission. "It's a question of a crossroads - on the one side we have this fascinating growth, and on the other side are reforms waiting.
"This year gave us a lot of positive things - people may now think that things are possible. It would be nice if Poland could utilize its five minutes."
In 1995, the auto sector was Poland's cash cow. An estimated $2.5 billion was promised by foreign auto makers vying for domestic market share in bids for local production sites to buck price-prohibitive duties. But industry observers expect outside investments in the sector to slow in 1996.
"In terms of manufacturing, I think things are going to go a little quiet now," says Rodney Joyce, an independent automotive consultant in London. He said the attraction of producing a foreign car in Poland is access to the growing number of car buyers. But production plans of local producers like Fiat, Daewoo and General Motors suggest that domestic demand will be met by the current players, leaving little room for newcomers with big plans.
"It's already getting a bit crowded," Joyce says.
The big deal
South Korea's Daewoo Corporation led the pack with an aggressive spending spree culminating in November with a $1.12 billion promised investment in the ailing Fabryka Samochodow Osobowych (FSO) plant.
The deal paved the way for a production target of 220,000 Daewoo cars over the next five years. The assembly of the mid-size Espero is set to begin this year with a projected annual output of 20,000 units. As part of the agreement, 60%-80% of the parts used in manufacturing any new model will be produced in Poland. The Daewoo Corporation now owns 70% of the shares in Daewoo-FSO Motors with the remaining 30% split between the Finance Ministry and FSO employees.
General Motors Poland made moves towards a $587 million greenfield investment. GM plans to build 100,000 Polish-made compact Opel Astras to heat up the low-priced, economy-car market. GM took the greenfield route after Daewoo squeezed it out of a production deal with FSO last summer. Experts see GM's plans to stay in Poland as a clear indication of the long-term viability of the country's car market.
The mega Daewoo-FSO purchase was only part of the South Korean auto maker's investment portfolio last year. In October, Daewoo Motors grabbed a 61% stake in Fabryka Samochodow w Lublinie (FSL), a light-truck factory. The price tag was set at $340 million, but President Tae Goo Kim of Daewoo Motors hinted at an increase in the Daewoo investment.
In two eleventh-hour deals signed by the Privatization Ministry, Poland's largest tire producers went into private hands on the same day. A 52.1% stake in Stomil-Olsztyn was grabbed by Michelin for $110 million. The French tire company promised an additional $150 million capital investment over the next four years.
Goodyear Rubber and Tire Co. bought a 32.7% stake in Poland's strongest tire maker Debica for $55 million. An additional $60 million was promised for the purchase of shares to gain a 57% majority. But as the Christmas holiday began, private shareholders threatened to scuttle the majority share purchase. The Finance Ministry originally gave the nod for the tire giant to buy additional shares at zl. 28 ($11.90) per share, a 33% discount from the zl. 40 ($16.30) market price. To make the purchase Goodyear needed approval from four out of every five Debica shareholders. Shareholders, mostly UK-based fund managers, did not want the value of their holdings diluted. They stood strong.
"It was the principle of the thing. The government shouldn't be allowed to sell at one price and the other shareholders at a lower price," said Frances Cloud of Nomura Equity Research in London.
Debica shareholders voted to approve the purchase, but Goodyear didn't get the bargain it was promised by the government. Goodyear settled for a 51% majority with a $60 million price tag.
Exports fuel growth
While planned investment in the automotive industry and related sectors, like parts and components manufacturing and retail gas outlets, received a good deal of attention in 1995, dynamic economic growth was a result of a general upswing in exports. Although that trend began to slow in the second half of the year due to the zloty's appreciation and declining demand in Germany, exports still rose by almost 18% in real terms.
The engine for this growth was the private sector, with over 200,000 companies now selling their goods abroad, compared with around 200 in 1990. Germany remains Poland's main trading partner, and almost 75% of Polish exports now go to European Union countries as compared with 29% in 1988.
Much of the trade is legal, but unregistered, cross-border trade that the International Monetary Fund estimates to be worth as much as $6 billion. Were this trade to be taken into account, Poland would have a trade surplus of around zl. 2 billion ($830 million). This led to an increase in official foreign currency reserves, now at more than $13 billion, compared with $6 billion at the end of 1994.
Because of the dynamic growth of reserves, the National Bank of Poland was faced with some tough monetary policy issues. If the NBP continued with the current mechanism - a floating peg devalued every month by 1.2% - money supply would continue to grow as the bank printed more money to drain foreign currencies from the market, leading to inflation.
A change in the mechanism, however, would mean an appreciation of the currency, and that would make Polish exports less competitive abroad. The NBP finally opted in late December for a one-off, 6% upward revaluation of the central parity rate.
Profitability and privatization
The improved economy was mirrored in the financial standing of companies. While Darwinistic market mechanisms continue to push the weak out of the market, in 1995 profitability figures for companies were the highest since the initiation of market reforms five years ago. Pre-tax earnings margins were at 5%, with 2% net profit margins.
The highest margins were in telecommunications (over 17% net) and manufacturing (around 6%).
In addition, companies were plowing earnings back into their businesses, as investment in industry increased by 44% in the first three quarters of 1995 in relation to the same period in 1994. The largest increases in investments were in food processing, leather products and paper and pulp. Investment outlays in transportation increased most dynamically, followed by investment in machinery and equipment.
Management of companies is also improving as accidental entrepreneurs learn the ropes of the market economy, analysts say.
"The businesses are better now," said Jacek Witak, a partner at venture capital group Renaissance Partners. "The companies we see now are more interesting in terms of sound business, aggressive growth and good strategies."
While privatization has slowed down somewhat, 1995 did see the start up of Poland's Mass Privatization Program after several years' delay, which has caught the eye of the international financial community for the opportunities it offers.
More than just a transfer of ownership through mass distribution of shares in state-owned enterprises like in the Czech Republic, the Polish program combines an element of management to the program. Fifteen National Investment Funds (NIFs) managed by international and domestic companies, have 33% lead shareholding in 29 companies, giving them effective control.
Their task is to provide professional advice and access to capital, and their pay is tied to the increase in the value of their fund, an incentive to helping companies grow and making them competitive.
The program will have an impact on capital markets through new securities in the form of participation certificates distributed at a token cost to the general public. The certificate can be exchanged for one share in each of the fifteen NIFs once they are listed on the Warsaw Stock Exchange, possibly by year's end, and many analysts say certificates are likely worth four times their price.
