Investments to pick up steam this year due to EU funds

‘Are there signs that EU-funded investments could pick up soon?'

Croatia: In 2016, we could see acceleration of net EU fund inflows, which increased from around 0.4% of GDP in 2015 to slightly above 1% of GDP in the first three quarters of 2016. Such an acceleration was recorded on both the secondary and capital accounts of the BoP, with the latter having the leading role, suggesting that this inflow should also be recorded in the gross capital formation data. Looking forward, we expect positive developments ahead, with EU fund inflows standing around 1-1.5% of GDP in the coming years, which represents a significant improvement when compared to recent years. However, such levels are still below the absorption potential and below the level recorded in peer countries.

Czech Republic: Investments were rather muted in 2016 and we expect them to gradually increase in 2017. Government capital spending in 2016 reached CZK 85bn and the government expects it to grow to CZK 104bn in 2017. Moreover, the approaching parliamentary elections in autumn 2017 could speed up some investments. On the other hand, the insufficient amount of prepared investment projects presents a risk of lower investment.

Hungary: According to official government statistics, about HUF 1,570bn (about EUR 5.1bn or 4.5% of GDP) worth of EU structural fund related disbursements were made in the current EU budget cycle by the end of the first week of 2017. Since there was a - temporary - hiccup in the EU fund related investment over the course of 2016, the contribution of gross fixed capital formation to GDP growth was negative last year. We expect investments to contribute visibly to GDP growth in 2017, as the disbursement of EU funds should accelerate; in addition, the utilization of the disbursed amounts should run up as well. Our estimate for the 2017 GDP growth rate is 3.4%.

Poland: EU-funded investment was a weak point of the last year, dragging growth down. Although we do expect higher EU funds inflow this year, so far, there has been no hard evidence that the trend has changed. The flow of EU funds in 2016 (Jan-Nov) was lower by roughly 1.2% of GDP compared to the same period of the previous year. However, there is a light at the end of the tunnel - the drop in the construction sector softened in November, and if such a development continues, it is likely that EU-funded investments are about to accelerate, supporting the growth of investment that we expect to see in 2H17.

Romania: EU-funded investments have gained some speed, beginning with the spring of 2016 in Romania, but their monthly evolution remained erratic. As a result, gross fixed capital formation in the entire economy grew at a slower pace than household consumption in the first three quarters of 2016. Documents and procedures for the absorption under the 2014-20 European financial framework are streamlined at present by local authorities and a gradual recovery of EU funds could be seen in the short term. The government expects absorption of EU structural and investment funds of EUR 20bn by the end of 2020 and EUR 31bn by 2023. The main challenges to the absorption of EU structural funds in the next one or two years are budgetary constraints related to the co-financing part of the EU-funded projects.

Serbia: As a candidate country, Serbia has access to various pre-accession funds, but only active programs have so far been implemented under IPA funds. As there are no official reports on fund withdrawals, we can only say that, in 2016, we could see some stronger inflows on the secondary account of the government sector in the BoP, most likely related to current transfers from IPA. The latest EU report on Serbia indicates that the country has made some progress on IPA fund absorption and that newly developed e-platforms should additionally improve the absorption rate. However, we do not expect significant contributions from these funds to the overall economic activity in the short run, as most of the IPA programs are aimed at important, but 'soft' investments in the institutional framework, human capital, etc. As for capital investments, Serbia is expected to continue to rely on bilateral deals with its traditional partners, such as UAE and China.

Slovakia: Economic growth accelerated in 2015, mainly thanks to faster EU fund absorption (2007-13 funds). An expected correction came last year, as EU fund drawing returned to lower levels and investments became a drag on domestic demand. The figures for the new programming period 2014-20 are quite low at the moment – just 1.94% out of the allocated EUR 14bn was approved by the end of November 2016. EU-funded investments from the new programming period should be picking up this year, although the pace is difficult to predict. The targeted amount by the end of 2017 is around EUR 632mn (4.5% of the total).

Slovenia: In the 2007-13 EU budget framework, Slovenia was one of the countries with the highest absorption rate, above 80%, and we expect a similar performance in the 2014-20 budgetary cycle. As for the recent BoP component developments, as already mentioned, for 2016, we could see a notable reduction of EU related funds on the capital account, while the current account recorded a milder slowdown. As Slovenian gross fixed capital formation was strongly determined by EU related funds, we could also see some slowdown in capital investments in 2016, while waiting for new EU funding to kick in. However, as new programs and projects start to unwind, we expect positive contributions from EU funds in the coming period.

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