More Investment Required

Mateusz Szczurek, Lead Regional Economist for the EBRD, Member of the European Fiscal Board, and former Polish minister of finance sat down with Richard Stephens to discuss Poland’s economic future.

Deputy Prime Minister and Minister of Economic Development and Finance Mateusz Morawiecki recently announced the biggest July budget surplus for 28 years. How do you perceive this?

Szczurek: Commenting on mid-year budget results is always tricky. First, there is a strong seasonality in investment spending, particularly in local governments. Secondly, we know there has been substantial reshuffling in VAT returns between 2016 and 2017. There’s a very large deficit related to that in the previous year, which helps a lot in 2017. That said, there has been some improvement in tax collection, which is a very positive thing.

On top of this, we are going through the peak of the business cycle, with very large consumption growth which helps both VAT intake and income taxes. So, cyclically, it is time for such results – you could read the budget situation as a symptom of the cyclical position of the Polish economy. One question mark is whether or not the overall level of budget deficit is low enough, given the fact that, from a demand perspective, things will not get much better across the cycle.

Do you mean consumer spending?

Yes. The question is if Poland prepared for a downturn which inevitably will come at some stage?. I’m concerned as there are a number of very big spending items which are not counter-cyclical, which will stay with us for longer. The ability of the state to react to downturns is perhaps not as strong as I would like to see. The 500+ family initiative and the early retirement policy is a burden on public spending and, perhaps more importantly, on the productive capacity of the economy. The availability of labour will be an ever-growing problem.

In a nutshell, where is Poland economically speaking?

Cyclically, we are in a very positive situation. Unemployment is at a record low, consumption growth is very fast and wage growth is picking up, which I think will continue, given the pressures in the labour market. At the same time, investments are very disappointing, given the shape of the rest of the economy. However, part of that is linked with the seasonality of public investment, part of that the EU and part of that local governments linked with the political cycle. Nevertheless, stagnant investment is somewhat disconcerting.

What type of investment are you referring to?

Public investment declined in 2016 and, if you look at the 12-month average, investment in GDP has declined to the lowest point since the 1990s. Concerning Foreign Direct Investment (FDI), I would argue that, at this stage of the country’s development, it matters less here. Poland has grown up, so I’m worried about investments overall, not just about foreign investments. Building on that, one of the important areas of EBRD activity in the country is promoting and supporting international expansion of Polish firms abroad, so when we talk about FDI these days, more often than not, we’re talking about investments from Poland rather than to Poland.

What would you like to see the government invest more in?

The notion of government investment is actually not very well defined. You could either talk about outright government investment, be it infrastructure or defence investments, or the investment of the state-controlled enterprises. If you have widespread change in management of these enterprises – as was the case in 2016 – you end up with the investment process being halted in the transition period as the new management gains experience. Clearly both government and SoE investment are needed.

In what ways can the private sector contribute more fully to the health of the Polish economy?

Further development of non-bank financing, something the EBRD is very active in, would help Polish firms to expand internationally, allow startups to develop more easily and grant access for small- and medium-sized enterprises (SME) to financing. There’s also diversifying the energy mix, which is not only just a problem of carbon emissions and global warming, but also air quality, health and resilience of the economic model, because it is a source of innovation and growth.

What type of project is EBRD looking to finance in the future?

Anything to promote the innovation of Polish companies and their integration with the rest of the world as well as the expansion of firms that are pushing the economy upwards. Another area we support is non-banking methods of financing capital markets in general, both for aiding the resilience of the banking system and for improving financial access to a wider range of companies and individuals. Equity is another very important area where we see additionality as high.

By additionality, I mean that we don’t do something if someone else can do it as well as us or better – together with sound banking, it is one of three pillars guiding how EBRD does business. If a firm can’t find the financing they require and it is a viable business move, then it’s a case for us. If you have a private equity environment which requires EBRD’s presence in a fund in order for it to take off the ground, then we are there – not to crowd out other investors, but to make sure the whole initiative has a chance to start. This is additionality. In Poland,  the list of areas that where we can help is far shorter than a country like Egypt or Lebanon.

What sort of practical help can you give to Polish companies wanting to expand abroad?

Funding is one area. Global expansion is inherently risky, and sometimes not well catered for in the local banking sector, so this is one thing EBRD can offer, especially if the investment leads into greater integration with the region. We’re particularly keen on firms looking into buying or expanding into countries of EBRD coverage, be it Central and Eastern Europe, Central Asia, the Mediterranean or Western Balkans. Global expansion brings benefits to the country or company investing because of new management practices, new types of business and products that a firm may acquire by buying a company in that country. The overall competitiveness of the Polish economy is enhanced by such an expansion because firms can gain critical mass, allowing them to compete globally.

To put things in perspective, in our EBRD universe, Poland is very advanced and rich.

Can you give a Polish example where it’s been important for EBRD to come in to help?

It’s not enough to have a sound business proposal – you also need transition impact, our third pillar. You need to be pushing the process of transition in the economy forward, along with the six transition qualities that we now use. A successful market economy must be inclusive, integrated, green – and the gaps are still rather large in Poland here – resilient, well-governed – in the corporate world as well as public – and finally competitive. But to put things in perspective, in our EBRD universe, Poland is very advanced and rich compared to many of the other countries that we work in.

Do you think Poland’s startup community has a promising future in Poland?

There is a lot activity, including in the public sector, with a number of venture capital initiatives at different levels that could provide financing for young firms. EBRD is active further down the line in this process: we do support companies that already have a product and are looking to expand globally.

Startups are an important part of the economy and one without which you do not get a well-rounded economic culture, but you have to remember that even in developed economies most associated with a vibrant startup community, you don’t get domination of startup-generated innovation overall. It is a crucial element, but not one that is sufficient for a competitive economy. The bulk of innovation is and will continue to happen in large companies.

Mateusz Szczurek is EBRD’s Lead Regional Economist in the Central Europe and Balkan regions. He is also a member of the European Fiscal Board and an adjunct assistant professor at the University of Warsaw, teaching public finance and international economics. He served as Poland’s Finance Minister between 2013 and 2015.

Some Polish companies for whom EBRD financing has been key for international expansion:

  • Telefonika Kable (UK)
  • Selena (Kazakhstan)
  • Barlinek (Ukraine)
  • Cersanit (Russia)
  • Asseco South Eastern Europe (Western Balkans)
  • Can-Pack (Regional)
  • (global)
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Written by: Richard Stephens

Richard Stephens founded Poland Today in 2012 to help bring Poland to the world and the world to Poland. Before this he was editor of Eurobuild CEE magazine in his first stint with the company, and then returned to conceive and establish The Eurobuild Awards, organizing the first two editions. He has a degree in Theology & Religious Studies from Bristol University in the UK.