Czech Construction Growth: Probably a Healthy Recovery

On the same day when the HSCO reported a very negative view on the Hungarian construction industry, the Czech CSO also released its main economic indicators for November 2009 (doc). The Czech construction industry grew by a national +7.8% compared to the year before, meaning that it has bounced back from the bottom. The output of the industry was helped by favourable weather (which may change the number of construction days because of Central Europe's weather). The average number of employees in construction enterprises (with 50+ employees) went down by 1.1%, but their average monthly wage reached CZK 32 670, a nominal increase of 5.6% and a real growth of 5.1%. This probably means that during the recession the construction companies have laid off their least productive workers, which will boost their productivity in the recovery.

Hungarian Construction Industry: Still Going Down, Negative Outlook

According to the latest data released by HSCSO today (pdf), in November 2009, the volume of construction activity decreased by 14.5% according to both unadjusted indices and to ones adjusted for working days compared to November 2008. In the first eleven months of 2009, output decreased by 4%. According to indices adjusted for seasonality and working days the production in November was 9.6% lower than in the previous month.

The number of total orders shows a bit of confusion, as a lot of companies went into insolvency and the remaining has relatively high orders. Also, a lot of relatively large projects were completed in 2009 and smaller ones are being built. Problems of financing and the disruption in the supply chain causes delays. However, the ultimate outlook is negative: The volume of new orders in November was 21.3% lower compared with the previous year. Within this, new contracts for building construction decreased by 1.6%. New orders for civil engineering works fell by 36.3%, compared with November 2008, highlighting the disastrous effect of Hungary's spending binge during growth and crippling pro-cyclical public spending in the recession.

92.5% of Enterprises Connected to Internet in Visegrad Countries

The average of the Visegrad Countries slightly lacks behind considering the Internet access of the enterprises comparing to the EU27. Slovakia has the best results with 98% of the enterprises with some type of connection while Hungary brings up the rear with 87%.
Based on the latest publication of the Eurostat there is not remarkable difference between large and small- and medium size enterprises but it may differ how they connect to the net or how they use it. Large enterprises are more likely to have mobile connection or a home page then SMEs.

Renewable Energy Act in Slovakia

The Act on Promotion of Renewable Sources of Energy and High-Efficiency Cogeneration has came into force on 1 November 2009 in Slovakia. Slovakia has an especially high energy-dependence even by Central European standards in the electricity, heat and fossil fuel sectors, too. Most of Slovakia's renewable energy comes from a single source, the Gabčíkovo water dam, whose environmental effects and economy had been the subject of a two-decades-long bitter dispute between Hungary and Slovakia.

The new act gives a number of incentives to build biomass, solar, wind or geothermic capacities with prices fixed to 15 years, a priority in the Slovak electricity distribution, and accessibility to direct state-aid. AmCham Slovakia's Connection magazine has a nice round-up (pdf) by Zuzana Sátková at PricewaterhouseCoopers and a legalistic review of the new act (pdf) by Vojtech Pálinkáš and Peter Šťastný of Allen and Overy.

A similar act was long awaited in Hungary, too, but now it is certain that the bill will have to be submitted by the new government as the current parliament will not make new laws before the after the April general elections. This gives Slovakian investment targets at least a year of competitive advantage over Hungarian ones.

Visegread External Trade: An Unhealthy Surplus

Hungary as a very open, manufacturing country has been strangely hit by the world economic recession. The country imports much of what it needs to produce and than export it, so it is not surprising that both export and import fell dramatically. All in all, this resulted in a very positive albeit non-sustainable trade balance. According to the Hungarian Central Statistics Office

In October 2009 the export volume fell by 3, while that of imports by 9 percent as compared to the low base level of the same month in the previous year. In January-October 2009, the volume of exports and imports fell by 15 and 21 percent, respectively, compared to the same period of the preceding year. Trade balance showed a surplus of HUF 1,069 billion (EUR 3,785 million), which meant an improvement of HUF 1,131 billion (EUR 4,100 million) compared to the deficit of HUF 62 billion (EUR 315 million) in January-October 2008.

There are a number of factors that came into play. Firstly, manufacturers did not import as much and used up their inventory to export to their largely contracted markets. Hungarian export are more euro-denominated than its imports where many commodities were paid in the weak dollar. Imports also fell as Hungarians consumed less. Exporters were also helped by a somewhat weaker forint, meaning that they received somewhat bigger forint revenues for their products. It remains to be seen if the Hungarian economy has adopted successfully and will run a healthy trade balance when some of these external factors will change after a world economic recovery.

A very similar pattern is visible in Slovakia, which is a smaller, and probably even more manufacturing-biased economy. The Statistical Office of the Slovak Republic reports that

In October, the total export of goods amounted to EUR 3 810,9 million, there was a 18,1 % year-on-year decrease. The total import of goods decreased by 21,8 % to EUR 3 585,6 million. The foreign trade balance was in surplus of EUR 225,3 million (it was higher than in October 2008 by EUR 158,9 million). Over the first ten months, compared with the corresponding period last year, the total export of goods decreased by 24,6 % to EUR 32 221,8 million and the total import of goods by 27,3 % to EUR 31 216 million.

The Czech Republic and Slovakia, also manufacturing national economies, also held a trade surplus in all months from Jan 2009 till Oct 2009.

(To be reviewed with Jan-Dec data in late February).

Sovereign Risk in Visegrad Countries

CMA, a credit information specialist, releases a quarterly Global Sovereign Credit Risk Report. In 2009Q4, the V4 countries were perceived as relatively safe within the Central European region. CDS spreads, which are counted implied probabilties of a country's sovereign default, are fairly low in the Visegrad countries.

The least country risk lies in Slovakia, barely above the level of Slovenia and most Western European countries which are also in the euro-zone. Although the Czech Republic is not a euro-zone member, it is just slightly above the level of Slovakia. You can hedge these country risks well below 100 bps, which is not much higher than in safe Western European economies. Poland is just slightly above the 100 bps level. Hungary is in the middle-group, almost at par with Croatia around 200 bps.

In the wider Central European region one can find some of the ten riskiest countries from a government bankruptcy point of view: Lativa, Lithuania in the Baltics and Romania near Hungary are all in the top 10 riskiest national economies.

Why investors watch CDS spreads? Even if you do not hold government liabilities in a country, you might not be able to liquidate your investment in case of a government default. When a government defaults, it becomes almost impossible to trade with its currency or exchange it to dollars or euros. Usually governments in default tend to nationalize foreign assets. If you invest into a country where the government defaults, you may have a difficulty in regaining at least a part or all of your initial investment. However, such default is very unlikely within the EU and the Visegrad countries are currently look rather safe.

2009: Biggest Investments in Poland

The Polish Information and Foreign Investment Agency closed 29 investment projects which were jointly worth EUR 767.9 mln in 2009. The projects will generate over 8,150 new jobs. PAIiIZ, the Polish government agency, rewarded three investors which executed the biggest projects in three categories: the biggest investment, investment which created the biggest number of jobs and the most important investment in the field of new technologies.

The biggest investment project's award went to Cargotec Poland, an affiliate of Cargotec. The company will construct a reloading machines assembly room in the Stargad Szczeciński Industrial Park. The project is worth EUR 64.4 million. The company's facility will mainly produce forklifts, cranes, gantry carts and tractors. By the year 2013 the investor intends to create at least 400 permanent jobs - 340 workers (electrical and mechanical fitters, foremen and employees of stores and paint shop) and 60 for managers.

The award for biggest new job-creation went to IBM Polska. IBM plans to generate 2,000 jobs for professionals in its Wrocław-based facility in accordance with the grant application. The process of recruitment will continue until 2013. Specialists will provide services, administer servers, databases, networks and applications for IBM customers who have their headquarters in Europe. IBM Poland employs Project Managers, IT Professionals and System Administrators. The centre is expected to start operating in spring 2010.

The award for introducing new high-tec via direct investment went to Woodward Governor Poland. The company forms part of the American corporation Woodward Governor Company headquartered in Fort Collins (Colorado) in the USA. The investor’s primary business activities are the design, manufacture and service of control and monitoring devices for the aviation industry, industrial engines, turbines and electricity generators. The company’s investment located in Niepołomice near Cracow is worth around PLN 35 mln. The facility will accommodate offices for engineers and supporting departments as well as a production floor.

Source: PAIiIZ