Poland, Hungary and Slovakia to have fastest economic growth in EU

Dec 23, 2003 01:00 AM

Poland, Hungary, Slovakia and the Czech Republic, the four largest countries joining the European Union next year, will have the fastest economic growth in four years as EU aid and a Western European recovery boost investment and output, said executives at companies investing there.
Their $ 460 bn combined economy, accounting for more than 80 % of the 10 future members' gross domestic product, will grow at least 3.5 %, compared with 3 % in 2003, the European Commission said. Poland will probably grow the fastest of the largest four largest countries, at 4.2 %.

Polish car-parts maker Stomil Sanok and the Czech and Slovak units of Volkswagen and other companies are raising production as business picks up in Western Europe, destination of more than 70 % of the four largest entrants' exports. The first of the $ 50 bn in EU aid pledged through 2006 will also become available.
"The new members will benefit in particular from the emerging recovery" in Western Europe, said Michael Heise, chief economist for Allianz, Europe's No. 1 insurer that has a combined 11 % market share in eight Central and Eastern European countries. "Foreign direct investment will remain high after enlargement. The contribution of the EU budget to the acceding countries will also be an impetus for growth."

The new members are outpacing Western Europe as they play catch-up after decades of communism and almost 15 years of developing functional market economies. Gross domestic product per person is about EUR 6,000 ($ 7,455) on average in the largest four, a quarter of the EU average.
EU entry may add as much as 2 percentage points to economic growth beginning in the third year of membership, according to economists such as Zsolt Papp, an emerging markets specialist at ABN Amro in London. The driving forces: aid to farmers and construction projects for building roads and sewage systems, farm aid and wage increases are set to spur consumer spending.

While some companies, such as Continental, shift production further east to Bulgaria and Romania in search of cheaper labour, other companies such as Volkswagen look to the new members as an EU foothold in a region where wages are still a quarter of the EU average. Ongoing asset sales and euro adoption, which will eliminate exchange-rate risk and transaction costs, will lure investment, Allianz's Heise said.
The four entrants have attracted about $ 160 bn in foreign direct investment since the 1989 ouster of communism, 72 % of the total for all of Eastern Europe, the European Bank for Reconstruction and Development said.

Poland and Slovakia are finalists for a $ 1.5 bn factory by Hyundai Motor. The South Korean carmaker is expected to make its decision by February.
"One of the deciding factors was that these countries are joining the EU," said Hyundai Motor Co. spokesman Jake Jang. "Cheaper labour costs are also a factor."
PSA Peugeot Citroen, Europe's second-biggest carmaker, is building a EUR 700 mm factory in Slovakia and Austrian paper mill Neusiedler, a unit of Anglo American, is spending EUR 240 mm to increase production 50 %. LNM Group, the world's second-biggest steelmaker, is buying a stake in Poland's Polskie Huty Stali, in a $ 2 bn accord. Poland raised $ 405 mm in November by selling a minority stake in Telekomunikacja Polska, its biggest phone company.

With virtually no trade barriers between the new countries, more of the new members' companies will tap each other's markets, said Elek Straub, CEO of Deutsche Telekom’s Matav, Hungary's largest phone company, and chairman of the local German Chamber of Commerce.
That means companies such as Royal Philips Electronics NV, which has factories in Eastern Europe, can move their products within the region freely.
"The real big opportunities will open up for small and medium-sized companies to step beyond the borders," said Straub. "Also, multinational companies that haven't moved products around in East European countries much because of customs duties will begin to do so."

At the same time, local companies, such as Hungarian oil and gas monopoly Mol, Polish refiner PKN Orlen and BorsodChem, Eastern Europe's largest PVC maker, are seeking alliances and regional expansion to fend off takeovers from the West and Russia. Mol bought Slovakia's largest refiner, Slovnaft, and a minority stake in Croatia's oil company. Mol and PKN are among the bidders for Unipetrol, the biggest Czech oil and chemicals company. Mol and PKN are in talks about a partnership.
BorsodChem, which owns a Czech company, aims to buy Spolana, Unipetrol's chemical unit, and PKN unit Anwil.
"In a few months being in the EU, we see BorsodChem as being in an excellent position to consolidate the industry," said CE Oil's and BorsodChem’s Chairman Georg Stahl. "We believe, based on the experiences we had in Austria, that EU entry will be hugely beneficial."

Faster growth will stoke inflation in the new members next year, economists said. Hungary will probably have the highest inflation rate, at about 6.6 %, compared with 4.6% this year, the central bank said.
Poland's inflation rate is forecast to pick up to about 2.5 % from below 0.9 % this year. Still, central banks are likely to cut rates in Hungary from 12.5 %, in Poland from 5.25 %, and in Slovakia from 6 %, economists said. Czech rates will probably rise from 2 %.

Source: Bloomberg
Market Research

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