Hopes for FDI revival ride on EU membership bid

European Union membership prospects and a planned streamlining of corporate laws should recapture some foreign direct investment (FDI) interest in Poland next year, economists said. But this year, the story is different since FDI will remain relatively stagnant, they added. While faltering global and domestic economies contribute to Poland's glum prospects for FDI in 2002, economists say that important corporate tax changes scheduled for 2003 and the country's planned EU membership could boost investment. Poland's preparation to further cut corporate income taxes and the confirmation of EU accession should put the shine back on the country as an emerging market play, they said. Next year, the government is expected to trim corporate income tax 4% to 22% in line with the low end of the tax scale throughout Europe, economists said. The tax plan, which was initiated under the government of former Prime Minister Jerzy Buzek in 1999, had lowered the corporate rate from 34% to 28% last year. Prime Minister Leszek Miller's government plans to push ahead with the reform. Economists pointed out that high corporate income tax incites firms to exploit a loophole called "transfer pricing," which allows them to count revenue from Poland as a part of operations from another country with softer income tax laws, said Mateusz Szczurek, a senior economist at ING Bank. "Some firms claim to pay for services to mother countries," he said. "Now the incentives for them would be much better (to stay in Poland)." Not only would foreign investors likely account for income and Polish revenue, but they would probably invest more in the area because of the easing of restrictions, economists said.

By the same token, foreign investors see certainty in Poland's membership in the EU, economists said. The country's entry date should be known by December or early next year, although most observers now believe the country will join the bloc in 2005. In the meantime, Poland still must close four of the EU's 30 accession chapters: competition policy, agriculture, regional policy and structural instruments and financial budgetary provision. Investors, economists said, are eyeing the accession process closely. "It will provide a very stable investment environment (once the chapters are closed)," Szczurek said. In 2001, Poland chalked up $7.1 billion in FDI mostly from Europe and the United States, a drop from $10.6 billion in 2000, according to figures from the Polish Agency for Foreign Investment (PAIZ). Economists expect FDI to continue to decline this year, possibly to $6 billion, owing partially to Poland's stalled privatization plans for companies, such as oil refiner Polski Koncern Naftowy Orlen (PKN Orlen), insurer Powszechny Zakład Ubezpieczeń (PZU) and Telekomunikacja Polska (TPSA). "I believe that (FDI) will be slightly lower than $7.1 billion, but more worrying is the structure (of FDI)," said Jacek Wiśniewski, the head of research at Bank Pekao, adding that last year, and according to preliminary reports for this year, few dollars came from "greenfield investments," money invested in new facilities or the rehabilitation of old companies. Greenfield capital is the most beneficial to burgeoning economies like Poland's. A large portion of Poland's FDI in 2001 came from reinvestment, from foreign companies not paying dividends to their home-country shareholders and instead reinvesting income in their Polish entities. "FDIs are very good for economic growth, especially for building new factories or restructuring existing companies," Wiśniewski said. This year, FDI will suffer further blows from both external as well as companies' internal conditions.

Firms such as France Telecom and others in Western Europe that have been grappling with mounting debt loads, a worsening global economy and plummeting bond prices, are loathe to pour more capital into Poland. "There does not seem to be an uptick in foreign activity," Szczurek said. "So Poland is obviously not going to be a place to invest in (now). No firm struggling to survive is going to invest in a country like Poland." FDI figures for 2001, released in April, indicated that Poland was still the leader in FDI receipts among Central and Eastern European countries, according to PAIZ. French corporations accounted for 33.3% of all investments with $2.4 billion, largely based on France Telecom's stake in TPSA. German corporations followed with $1.36 billion, or 19% of FDI, while U.S. corporations invested $687 million, or 9.6% of FDI. At the same time, foreign bond investors have also been discouraged since rating agency Standard & Poor's lowered its long-term local currency, sovereign credit and senior unsecured debt ratings on Poland last month. Investors typically view changes in S&P's country ratings as an accurate barometer for the health of national economies. "Complacency toward persistent high fiscal deficits and/or slippages in the structural reform agenda, including the necessary restructuring of public spending, could result in downward pressure on the ratings," said Beatriz Merino, a London-based credit analyst at S&P.