Krzysztof Bień
Today’s Europe is a risk area; Asia’s economies have been slowing down. There is plenty of capital in the world. It is searching for places like Poland: large-scale investments are possible, the economy is strong, there is no political risk, there is a chance for sound financial foundations. The key is to build confidence in the Polish economy, says Igor Chalupec, a partner and Chairman of the Board of Icentis Corporate Solutions.
The Financial Observer: What impact may the eurozone crisis have on the willingness to invest in our part of Europe?
Igor Chalupec: Everybody is expecting the willingness to invest to decrease but, paradoxically, I would like to point to the reasons why there is a whiff of optimism. When you talk to financial investors – feelings among industrial or strategic investors might be different – you see an increasing interest in Poland. One of the reasons is the devaluation of zloty which has taken place in the recent months. It has cushioned the crisis and has been helping exporters and thus the Polish economy, too.
A weaker zloty also makes it cheaper to invest in Poland; a factor which often escapes our attention. Investors see it like this: if the Polish government succeeds in implementing a fiscal consolidation programme, and there are reasons to have confidence in it, the Polish currency will not be affected by the epidemic in the long term and it will grow stronger. Not soon, perhaps, but in the future. It is therefore an opportunity to buy assets in Poland relatively cheaply.
Why would investors choose Poland?
In places like The City in London, where the greatest number of all kinds of investments fund operate, there is a big need to find new economic heroes. The old heroes are tired. There have been fears that Asian countries, which have attracted the greatest attention recently, will be developing more slowly. Today’s Europe is a higher risk area, you do not see a potential for growth. For someone who has available cash, and there is still a lot of cash around, there is nothing to invest in these days. Hence the demand for investment spots, such as Poland: the scale of investments may be adequately large, there is an appropriate economic potential and a consumption potential, exporting opportunities, there is no political risk and the foundations are sound – which is believed in – in the form of a fiscal consolidation. The crisis which we are currently experiencing in the European economy obviously continues to be a crisis, but at the same time there are certain opportunities. I think that we can be heroes.
(…)
Regardless of what may still happen in Europe? You can imagine the crisis deepening – recession, printing money, rising inflation and the cost of money. All this may even more discourage investments near the eurozone.
I am not saying that there will not be problems. If recession affects the markets which Polish companies export to, there will be fewer orders, and this will have impact on the employment in Poland, on the investment level, which will in turn be reflected in the consumption level. However, this does not mean that we will have to face a crisis of confidence in Polish treasury bonds and the zloty. We may be affected by the European crisis; but only affected.
The funds have been looking for a good place to invest. Do they even have free investment capital?
There is still plenty of money. Raw material countries or the Asian states have huge surpluses of it. Financial investors also have money in private equity funds which in the recent years have accumulated vast assets and thus far have not allocated them. So far, many of these surpluses have been invested in places where the capital is safe, such as the USA. The yield on American bonds is again at an all-time low despite the American economy not blossoming at all. However, the dollar is the most important reserve currency. And this is where money is invested these days.
At the same time, European banks hold too little capital, considering the new capital requirements. Why is the money not flowing there?
European banks lack capital not because there is no money but because the capital owners do not want to invest in these banks.
Why is that?
They are seriously apprehensive about the transparency of bank balance sheets and, as a result, about whether or not such investments could be lost. Banks in the eurozone may also have problems with earnings: who to give loans to, where to make a profit on investment banking in the wake of weak capital markets, what to do with the thousands employed in unprofitable branches and divisions of banks? These are the questions which face the boards of directors of banks as well as their shareholders.
So, is confidence the issue?
We have been having a dramatic crisis of confidence. This is the main problem in financial markets today, and not the lack of money.
What conditions have to be created for the capital to have confidence in a market like the Polish one?
I have already mentioned the fiscal consolidation, but it needs to be continuously emphasized. The absolute priority is to curb budgetary spending, to lower the deficit and public debt. This is why I perfectly understand that the prime minister, the finance minister and the government put the main emphasis on that. Because the greatest risk is to become an area infected by the crisis of confidence. We should do everything as a state, the central bank, the Ministry of Finance, the Financial Supervision Commission, to build confidence in the Polish economy, perhaps even excessive confidence. Confidence in us is key.
Is this the context in which we should look at the Polish readiness to bolster – through a loan – the IMF rescue funds?
Yes, but I think the context is even wider; it relates to the strategic option of the Polish foreign policy. It is the context of Poland’s very strong foundations in the European Union structures. The division into the eurozone and the rest is to be avoided at all costs; this is about, as minister Sikorski colloquially put it, being at the table, and not being a menu at the table. Should the EU split into the “proper” union and the rest, we need to become part of the proper one and not find ourselves with the rest.
The UK holds a different view. Why is that?
I do not know about the whole of the UK, but I know what The City in London is thinking. They are mostly convinced that they are doing fine. They think they can afford to be another Switzerland, let us put it like that. In their opinion, the euro project was built on flawed foundations, and they do not believe that it can be fixed. In short, I think that many people in The City would rather live in a 52nd state of the US than in the 27th state of the EU. Or to have both, if possible.
(…)
However, some categories of production and investment are not profitable anymore. The business model based on cheap labour is coming to an end. Will that become an obstacle for investing in Poland?
It is true that the business model based on cheap labour is becoming a thing of the past. On the other hand, in the last decade, the Polish economy has shown an incredible and unprecedented rise in labour efficiency. The significance of other factors, which are negative from the point of view of business, has decreased. Investors were wary of the important role of trade unions. However, it turned out that the trade unions eliminated themselves through their alliance with politics. There were fears of monopolies. Regulatory bodies (the Energy Regulatory Office, the Office of Electronic Communications, the Office of Competition and Consumer Protection) turned out to be more effective in dealing with monopolies than expected. They do not allow anyone to play around. This might be the most difficult in the case of gas or energy market, but even there the changes have been positive.
All these things have been positively received by investors. And there is more. Courts work better and better. We might not appreciate this fact but, generally, we have also managed to deal with corruption. That is why plenty of investors have decided to invest in Poland. Even if the returns on investments are lower than in Russia, they do not go for Russia or Romania. They choose Poland.
The Economist Intelligence Unit pointed out in one of their recent analyses that many new investments in the motoring industry are taking place in Hungary, the Czech Republic, Slovakia and Romania. Not a word about Poland. If Poland is so attractive, why has it failed to attract those investments?
When the tenders and decision-making processes were under way, those countries decided on very extensive concessions, preferences, subventions. Perhaps rightly so, perhaps they were wrong; in Poland, the decision was not to exceed some limits. Those investments all of a sudden made Slovakia one of the leading car-manufacturing countries in Europe. In my opinion, that was a good deal for Slovakia. On the other hand, the examples of Spain, Portugal or Greece have shown that it can be risky to make the economy dependent on a single, artificially boosted sector or industry. Everything is fine as long as there is a big demand for cars but if there is a slump in the industry, the country is going to have a problem. That was especially the case with Spain. The entire incredibly flourishing construction sector stopped and dragged the whole economy down.
(…)
If there is no shortage of capital, would there be enough to „domesticate” banks?
I will say something against the trend again, but I do not understand why prominent figures get involved in the discussion on this issue; they even try to outdo each other in their admiration for this idea. There was a real chance to „domesticate” Bank Zachodni WBK. Somehow, that did not happen. This is a simple market: someone has to be willing to sell and someone has to be able to buy. I do not see any sellers, and I would prefer not to look for buyers among the state-owned companies, because this will mean squandering the transformation achievements of the recent years. For example, if Leszek Czarnecki decided to make such an investment, or if Jan Kulczyk decided to expand to this sector, or Zygmunt Solorz (although he invested in something else), it would be fine; this is private capital. It would be a mistake to renationalise the banking sector.
Interview by Krzysztof Bień
Igor Chalupec is a partner in and Chairman of the Board of Icentis. Previously, he worked as a stockbroker, he was Vice-Chairman of the Board of Pekao, Deputy Minister of Finance, President of PKN Orlen.