Compared to most of their European neighbors, Poland, Hungary, the Czech Republic and Romania look more economically resilient. Earlier this month, I met with a number of companies and government officials from the four countries. Officials project continuous economic growth of more than 3% in all four. Most encouragingly, unemployment rates have been falling and resilient real wage growth is a consensus in the countries' public and private sectors.
As members of the European Union with highly educated labor forces and decent infrastructure, one key question I had throughout the meetings was, "What would be the sustainable internal growth rate in these countries?" Part of their growth over last decade has been assisted by the European Structural and Investment Funds (ESIFs), the European Union's main regional development policy tools. The ESIFs' first phase of implementation ran from 2007 through 2013 with a total budget of around EUR170 billion. Poland, as the biggest Central European economy, received 38% of the budget, followed by Hungary at 16%, the Czech Republic (14%) and Romania (11%). About 70% of the budget was allocated to building transportation and energy infrastructure; environmental protection projects; and labor market and human capital improvement programs. Especially in the last three years, these countries worked to increase the absorption rate before the 2nd phase of implementation from 2014-2020, so the ESIFs have been an important contributor to growth, especially given slowing global growth. The size of the funds to these countries was around 20% to 25% of gross domestic product (GDP) during the 2007-2013 period. Though there was a co-investment requirement of 15% in project value and certain costs such as land purchases were borne by each country, the ESIFs have been of significant benefit without doubt.
In coming years, the relative impact of the ESIFs phase two on GDP is expected to be lower by 5% to 10%, most notably in the Czech Republic. This alone does not necessarily imply lower growth for these countries. In fact, they have improved their fiscal profiles. Their current account-to-GDP ratios have also improved, and the private sectors in each have deleveraged significantly, especially in Hungary. Going forward, what these countries really need is more entrepreneurial activity, which we have seen in varying degrees. Poland is more advanced in entrepreneurial activities compared to peers. Romania seems to be just taking off with its great pool of IT talent.
As a long-term investor, I came back from the trip with a wish list. First, I hope to see some improvement in indicators, such as R&D spending-to-GDP increase from the current 1% to 1.5% level, matching other emerging market peers such as Brazil, Russia, India and China. Secondly, I hope to see more development of managerial expertise. Many domestic brands are established by local entrepreneurs but then bought by multinational companies, so a shortage of managerial expertise to scale up the businesses could be the reason. The available investment universe listed in national stock markets is somewhat limited to certain industries such as energy, utilities and financials. However, the bright side is private investment capital started to flow into the region and several large technology companies are setting up innovation centers to tap into local talent pools. I believe this will lead to deepening of capital markets in the region and provide us with more exciting investment opportunities in coming years.
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