Poland needs $100 billion in FDI to stay fiscally fit
If Poland wants to continue financing its widening current-account deficit, fund upgrades in infrastructure, telecoms and agriculture necessary for European Union (EU) entry, it will need to attract roughly $100 billion in foreign direct investment (FDI) over the next decade, economists said.
"The government is fully aware of the magnitude; Poland needs massive inflows of FDI," said Krzysztof Bledowski, chief strategist at Wood & Co. "Ten billion a year (in FDI) is a necessity."
In 1999, Poland attracted total FDI of $9 billion, 12.2% less than in 1998, according to the Economy Ministry. Roughly $32 billion has flowed into the country since 1993, according to the Polish Agency for Foreign Investment (PAIZ).
Because the country has relatively low savings levels and therefore cannot fund its own capital needs internally, economists said that high levels of foreign investment will be necessary for many years to come. Strong FDI inflows will give the country the economic stability it needs as the import of technology and equipment expands the current-account deficit, economists said.
Both the current account deficit and gross domestic product (GDP) growth took a battering last year. In 1999 the current account deficit hit 7.6% of GDP, or $11.66 billion, up 70% from 1998. The number is not expected to decrease in the near future economists said the current account should hover around $10 billion annually for years to come.
At the same time, GDP growth for 1999 was also lower at 4.1%, compared with 4.8% in 1998.
"Poland needs FDI to tie over the current account deficit and develop the economy in the medium term," said James Owen, an economist at SG Bank. "And joining the EU is part of developing the economy."
Bledowski said the sale of state assets will help things along in the short term, with the government predicting zl. 20 billion ($4.9 billion) in privatization revenue this year. But those direct sales of strategic stakes in companies will dry up in two to three years' time and from then on, greenfield investments will play a much more important role, he said.
Much of FDI inflows will also come from a combination of direct sales of stakes in Polish firms and additional investment into modernizing those firms. For example, two weeks ago Swedish company Vattenfall purchased Warsaw power plant Elektrocieplownie Warszawskie for $230 million. The company said it plans to invest a further $600 million in the plant over the next decade.
Overall, Poland is still seen as ripe for investment and capital inflows have grown steadily in recent years. The National Bank of Poland (NBP) said that cash inflows in the first 11 months of 1999 reached $6 billion, up 22% from the same period in 1998. The 1999 figure is also double the $3 billion Poland attracted during the first 11 months of 1997, said Krzysztof Rybinski, chief economist at ING Barings. Cash inflows are the total amount of inflows of foreign currency during a year.
Also, a recent poll of the world's 1,000 largest companies rated Poland the fifth-most attractive country worldwide to invest in, behind the United States, Great Britain, China and Brazil, he said. And as EU accession draws closer, Poland will become an ever more desirable location, he said.
"There's a lot happening underneath the surface," SG Bank's Owen said.
He pointed to a flurry of greenfield activity last year, which accounted for more than 50% of 1999's FDI. The automotive sector saw significant greenfield investment, with Japan's Isuzu Motors investing $200 million, and Volkswagen and Toyota each putting $150 million into car plants, said Mariusz Pypec, an analyst at CA IB Securities. Poland has been seen as an ideal location for investment in the auto sector, as companies here will eventually be able to supply the larger European market unhindered by import taxes.
The government's decision this year to lower corporate income taxes to 22% by 2004 from the current 34% will also aid investment.
While foreign investment has been strong so far, economists said that the country still has to overhaul much of its systems and regulations if it wants to continue being an attractive locale. Bledowski said that excessive paperwork, bureaucracy and the difficulty of getting grants hinder start-up operations. Furthermore, he said Poland needs to minimize the costs of moving goods and improve the quality and availability of its transportation if such levels of FDI are to hit the country, he said.
If this happened, many of the sectors that need investment would receive it more readily, economists said. "Infrastructure, the energy sector, telecoms, agriculture: all these need billions of dollars (to reach) EU standards," Rybinski said.
