FDI tale with a happy ending

SLOVAKIA attracted less foreign direct investment in 2004 than its neighbours, but economists are rosy about the future. They say 2005 will be a successful year for the country in terms of FDI.

SLOVAKIA attracted less foreign direct investment in 2004 than its neighbours, but economists are rosy about the future. They say 2005 will be a successful year for the country in terms of FDI.

During 2004, Slovakia received foreign direct investments worth Sk27.044 billion (€678 million) while Slovak companies invested Sk1.1 billion (€28 million) abroad. Compared to 2003 there was a decrease in FDI of Sk8.7 billion (€219 million), according to data provided by the Slovak Statistical Office.

The majority of foreign direct investments (Sk21.996 billion or €553 million) were destined for the business sphere, while Sk5.05 billion (€127 million) went to the banking sector.

The biggest investors in Slovakia last year were Hungary (Sk6.191 billion or €155 million), Austria (Sk6.122 billion or €153 million) and the Czech Republic (Sk4.43 billion or €111 million).

The Slovak media regarded the numbers with pessimism, pointing out that Slovakia receives the least FDI per capita than the other Visegrad Four countries - Poland, the Czech Republic and Hungary.

Last year, the country absorbed $155 per capita, while Poland received $203 and Hungary took in $397, according to the daily SME.

The local media suggested that Slovakia's status as an "investment paradise" is a view that is only supported in the foreign media, as it is not backed up by the numbers.

However, chief analyst with the VÚB bank, Zdenko Štefanides, explained that the media's gloomy outlook is due to a certain shortsightedness. He says the media made its pronouncements only after referring to those incoming investments that took the form of equity capital and reinvested earnings.

"These, to be sure, decreased to Sk26.3 billion (€661 million) last year from Sk37.6 billion (€945 million) in 2003. However, Slovak companies receive foreign direct investment in various forms, for example inter-company loans, another form of capital that increased last year over 2003. In my view, the sum of these two categories is the more relevant measure of inward foreign direct investment. From this perspective, FDI increased from Sk26.4 billion (€664 million) Sk35.7 billion (€898 million) in 2004," Štefanides told The Slovak Spectator.

"According to the National Bank of Slovakia, which collects FDI data, net FDI inflow into the Slovak Republic last year amounted to Sk40.6 billion (€1.02 billion), whereas in 2003, net FDI amounted to Sk25.57 billion (€642 million. Hence, net FDI increased in 2004 over 2003 by nearly 60 percent," Štefanides said.

The Slovak Investment and Trade Development Agency (SARIO) agrees with Štefanides that the numbers are positive.

"There is an ongoing increasing interest in Slovakia from potential investors. Besides, the SARIO method of calculating the influx of foreign investment differs from the method of the National Bank of Slovakia. SARIO considers an investment project successfully completed when an investor legally binds himself to invest a declared sum and employ a declared number of people, either in the form of an investment agreement or a memorandum of understanding or a branch in Slovakia. Certainly, the real process of an influx of capital and hiring might be a question of an additional two or three years," agency spokesman Ondrej Žember told The Slovak Spectator.

"SARIO is currently working on approximately 300 investment projects in different stages. About 40 projects worth a total of €2 billion are in the final stages of completion," Žember added.

Analysts expect 2005 to finally bear the fruits of ongoing investment projects.

Silvia Čechovičová, an analyst with ČSOB Bank, told The Slovak Spectator: "We expect that in 2005 the FDI will increase year-on-year reaching a level of Sk70 billion (€1.75 billion). Statistical data will finally reflect the sale of Slovenské elektrárne to Italian Enel, which will pump up the volume of inflowing privatization investments, and the numbers could finally reflect several big projects that were announced last year - for example Getrag Ford, Johnson Controls and Fauretia.

The influx of investments should continue mainly to the automotive sector."

According to Štefanides, the overall net FDI in Slovakia in 2005 will increase two-fold over 2004.

As for the numbers showing Poland, Hungary and the Czech Republic as more attractive to foreign investors, Štefanides says that while this has been true for the past 10 to 15 years, the trend is shifting.

"The lead our neighbours have had is largely thanks to FDI-friendly policies being implemented sooner, but Slovakia is gradually closing the gap. Our recently implemented reforms, which made local business conditions somewhat superior over our neighbours and particularly appealing to foreign investors, will turn the tide," Štefanides told The Slovak Spectator.

Based on the latest data, more than 80 percent of foreign direct investments were destined for the industrial sector, almost 73 percent of which went to Bratislava region.

Slovak companies focused their investments mostly on the Czech Republic and Ethiopia; the focus was mostly on investments in the industrial sector.

Total Slovak capital in the world by the end of 2004 represented Sk19.655 billion (€494 million), Sk19.1 billion (€480 million) of which was in the business sector and Sk500 million (€12.57 million) into the banking sector, the TASR news wire reported.

Recent surveys suggest that investors favour smaller countries like Slovakia, Latvia and Lithuania for FDI.

The country's EU membership greatly limited previous political risks that made investors cautious about pouring their money into the country.

According to analysts, accelerated privatization also played a major role in increasing FDI flows into Slovakia in recent years.

"The inexpensive yet skilled and disciplined labour force, good geographical location close to core Western European markets, and reasonably developed infrastructure, especially in the western part of the country, are Slovakia's advantages.

"Clearly, investors are taking notice, especially in the manufacture of cars and electronics for export," Štefanides said in mid June, 2004.

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