Investment dynamics could pick up moderately this year

‘How much pickup can we expect in private investments in 2017 & 2018?'

Croatia: In Croatia, we see total investment dynamics in the 5-7% y/y region in the mid run, which will lead to the strongest contribution to the overall growth figure in 10 years (the last 5% y/y increase was recorded in 2007). Although an acceleration of EU funds will be supportive for some public investment projects, we see the biggest push coming from the private sector. As key supportive factors, we see improving economic conditions, rising sentiment, a lower profit tax burden, some red tape cuts, a stronger slowdown of the deleveraging process and a gradual recovery of corporate loans. There are already some big ticket privately-financed tourist projects in the pipeline whose realization is expected in the coming period.

Czech Republic: In recent years, private investment in the Czech Republic has become more and more linked to the ability of the country to tap EU funds. Therefore, negative y/y figures in 2016 were to a large extent due to a high basis in 2015, when we saw a last-minute effort to exhaust the remaining balance in EU funds for the 2007-13 programming period. Investment is likely to rebound in 2017 and 2018 to around 2% and almost 3%, respectively. The main driver of this rebound will again be improved tapping of EU funds - those for the new programming period (2014-20). Pressures in the same direction will come from strengthening foreign demand. This positive pattern will be limited to a certain extent, mitigated by household investment, where saturation from previous years and stricter regulation will cause household demand for homes to weaken.

Hungary: Investments, including private investments, have been largely dependent on the absorption of EU funds. Should the utilization of structural funds pick up in 2017 and 2018, both public and private sector investments could rebound. However, there is a risk that the process may be slower than expected, which could result in enervated investment activity. Since there are no publicly known steps from the EconMin to foster competitiveness and reduce the administrative burden for companies, we see no underlying reason for private investments to significantly strengthen without the boosting effect of the EU funds.

Poland: The private sector remains cautious in planning new investments this year. According to the latest NBP survey, only one in three companies is about to begin new investments - that is the lowest share since the crisis. The relatively high level of uncertainty related to the recent political development is seen as the main reason for companies holding off investment activity. As opposed to last year, when low EU funds were behind the drop of investment, this year, higher absorption of EU funds should be positive for private investment activity. All in all, we see investment growing 4.3% in 2017.

Romania: The share of private sector investments in GDP could remain almost constant at 21.5-22% in 2017-18, in line with a gradual increase in corporate lending and better absorption of EU funds. Private investments in the residential sector are likely to remain elevated in 2017, as mortgage lending in LCY is growing fast at present, spurred by a state-subsidized  program and still low interest rates. On a less positive note, public investments in infrastructure could be weak in 2017, due to limited local funding available for new projects, which in turn is likely to restrain the growth of private investments in equipment.

Serbia: Serbia was one of the top performers in the Doing Business scale and was pronounced one of the top 5 investment destinations by Ernst & Young in 2016, due to legislative changes in recent years aimed at improvement of the business climate (investment law, bankruptcy law, etc.). In addition, investor-friendly bilateral agreements between the Serbian government and foreign investors started to attract FDI and, according to NBS reports, in 2016 most of the FDI was directed at the manufacturing sector. More favorable regulations, a recovery of lending activity and stronger economic footprint are also supportive for domestic private investments. All that said, we see investment activity expanding around a robust 8% y/y in the years ahead.

Slovakia: Investment was a drag on growth last year, as the anticipated correction after 2015's rapid EU funds utilization materialized. Public investments marked a substantial y/y decrease, which could not be compensated for by private sector investment. This year and the next, we expect investment growth to pick up somewhat, aided by the good economic environment and sentiment, still accommodative monetary policy and better EU fund absorption from the new programming period. In the private sector, investments in industry such as building of the new Jaguar Land Rover plant in western Slovakia should contribute considerably. Nevertheless, the ratio of private investment to GDP has fallen since 2006 and, despite the anticipated pickup, is unlikely to be substantially above 20% of GDP in the near future.

Slovenia: Slovenia's investment profile has been and (in our view) will remain mostly shaped by EU fund related projects, realized through public or public-private partnership deals. However, we expect private manufacturers, mostly exporters, to keep their active role and continue to contribute to the overall investment activity, especially as the economic outlook in most of the trading partners has become more favorable. Thus, we see investments at around +5% y/y in 2017 and 2018, vs. a negative result in 2016 (caused by a glitch in EU funds between two EU budget cycles).

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