Investment and Investment Finance in Croatia, how can the EIB contribute?

Dario Scannapieco and Debora Revoltella European Investment Bank

24 March 2014

Outline

• EU and Croatia – key challenges • The Investment and Investment Finance crisis • How can the EIB contribute?

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EU real and potential growth Change in potential output growth - 2013 vs 2007

EU recovery on the cards, but the crisis has led to a significant reduction in growth potential

Source: Eurostat, European Commission

Real GDP growth forecasts - 2014

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Change in investment between 2008 and 2013 (2008 = 100)

Gross fixed capital formation as a share of GDP

Still in a deep investment crisis

Source: European Commission

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Unemployment rate (total) (in percent)

Unemployment rate (in percent)

The employment crisis brings to the fore short and long term issues

Source: Eurostat

24 March 2014

6

Europe is falling behind in terms of productivity growth

Average productivity growth for the EU, Japan and the United States

* For comparability only EU-OECD member countries considered

6

Outline

• EU and Croatia – key challenges • The Investment and Investment Finance crisis • How can the EIB contribute?

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Decline in gross fixed investment in the EU

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-40%

-30%

-20%

-10%

0%

10%

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Total EU – relative to the 2008 average

Other investment Machinery and equipment Non-residential construction

Residential construction Total investment

-40%

-30%

-20%

-10%

0%

10%

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Vulnerable EU countries – relative to 2008 average

A different story in Croatia and in the NMS

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-40%

-30%

-20%

-10%

0%

10%

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Croatia – relative to the 2008 average

Other investmentMachinery and equipmentNon-residential constructionResidential constructionTotal investment

-40%

-30%

-20%

-10%

0%

10%

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

New member states – relative to the 2008 average

RDI investment gap

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Average annual growth in R&D expenditure in 2009-2011 and R&D intensity in 2008

Source: Eurostat

While some MS continued to close their RDI investment gap, RDI investment growth has stalled in others

Investment vs fiscal challenges

Gross fixed capital formation 2013 Public investment (2007 = 100) vs. 2013 gross debt / GDP

Percent of GDP, 2013 Percent of GDP, 2013

Source: AMECO, 2014 Winter Forecast

0.0% 10.0% 20.0% 30.0%

EstoniaRomania

Czech RepublicLatvia

BulgariaAustria

BelgiumFrance

FinlandPoland

LuxembourgSlovakiaSwedenCroatia

SpainHungary

LithuaniaEU28

DenmarkGermanySlovenia

ItalyNetherlands

PortugalMalta

United KingdomGreeceIrelandCyprus

private public

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The impact of the crisis on investment performance

Source: Own calculations based on the Orbis database (Bureau van Dijk)

Nominal annual returns on investment by non-financial corporations in the EU

0%

3%

6%

9%

12%

15%

2005-2007 2008-2011

The most immediate cause of the investment decline has been uncertainty

10 March 2014 13 European Investment Bank Source: Baker, Bloom, and Davis at www.PolicyUncertainty.com and Eurostat

Annual rate of change of business fixed investment against an index of economic policy uncertainty (1997-2012)

-20%

-15%

-10%

-5%

0%

5%

10%

50 70 90 110 130 150 170 190

2009

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Finance is not a problem across the board but it is a serious constraint for some countries, sectors and firms

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Source: Eurostat

Investment and savings by non-financial corporations in the EU (in EUR bn)

-400

0

400

800

1200

1600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Gross savings Net lending (-) / borrowing (+)Net capital transfers Gross fixed capital formation

Correlation between national investment and saving rates

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15%

20%

25%

30%

35%

10% 15% 20% 25% 30%

Inve

stm

ent r

ate

Saving rate

2002-2007

15%

20%

25%

30%

35%

0% 10% 20% 30% 40%In

vest

men

t rat

e

Saving rate

2008-2011

Source: Wagenvoort and Torfs (2013) in Investment and Investment Finance in Europe, EIB Publication.

Before the crisis, financial markets of the EU were fully integrated, as measured by the independence of investment rates from saving rates. The crisis has reversed this development and made national borders within the EU obstacles again.

Financial fragmentation - the crisis has led to a collapse in intra-EU capital flows

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Source: Commission – ECB surveys on SME finance

Diverging access to finance conditions for SMEs

Main policy implications

Resolving uncertainty needs commitment and rapid progress on the institutional reform of European banking

Public policy should seek to enhance bank lending and alternative finance sources where there is evidence of financing gaps

Last but not least, with some countries suffering from persistently low investment returns, structural reforms that encourage a shift of resources to more productive activities need to be continued

Specific in Croatia – Focus on structural reforms and shift of resources towards more productive activities. Capital accumulation a constraint to growth following the crisis, with uncertainty a key constraint, but also access to finance?

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Outline

• EU and Croatia – Key Challenges • The Investment and Investment finance crisis

• How can the EIB contribute? • The role of the EIB

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The EUROPEAN INVESTMENT GROUP at a glance

The European Investment Bank

Providing finance and expertise for sound and sustainable investment projects. Total assets of EUR 512 billion at end 2013 Natural financing partner for the EU institutions Shareholders: 28 EU Member States

• Largest multilateral lender and borrower in the world AAA-rated and strong capital base Projects in over 160 countries

The European Investment Fund

Leading developer of risk financing for entrepreneurship and innovation across the EU – supported over 1.5 million SMEs over 20 years Shareholders: EIB (62.1%), European Commission (30%), public and private financial institutions (7.9%)

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2012/2013 – The EIB - largest and most efficient IFI

Peer group of MDBs whose areas of operation include Europe

Notes: EIB accounts as at 31 December 2013. World Bank and IFC accounts as at 30 June 2013. EBRD accounts as at 31 December 2012. Loan portfolios are normally net disbursed loans. The IFC Portfolio (only) also includes equity investments. *IBRD only

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Signatures and disbursements

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Responding to the EU challenges

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Targeting SME lending to needs

SME & Mid Caps lending targeted to needs

EIF in particular • Equity: EUR 1.5bn (68 early / growth stage funds raising EUR 7bn); • Guarantees: EUR 1.8bn (69 transactions attracting EUR 8.6bn of new loans for SMEs); • Support for micro-enterprises (EU-28): EUR 54m, generating a loan volume of EUR 201m.

More than 140 000 SMEs supported

Growth and jobs: four key priorities

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‘Investing for Youth’ – EUR 9.1 bn, July-Dec 2013

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EIB in Croatia in 2013

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EIB lending in Croatia in 2000-2013 - EUR 3.6bn

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By sectors: % of GDP:

7.5

3.6

0 5 10

HR

EU

EIB in Croatia

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In the context of Croatia having joined the EU in July 2013, and against the background of considerable economic challenges, the EIB can:

• finance projects eligible for co-financing with EU Structural and Cohesion funds that are available following Croatia’s EU accession;

• provide capacity building in project preparation and implementation and EU fund absorption;

• support public and private sector investment, particularly in the tradable sectors (including services), bearing in mind the need of the country to improve its competitiveness; and

• facilitate access to finance for SMEs and corporates that may be credit constrained

EIB project financing in Croatia in 2013

Strategic infrastructure sector

In 2013, in the field of trans-European transport and energy networks (TENs), the Bank provided EUR 80m to finance the expansion of Zagreb Airport, being the first EIB PPP project in Western Balkans region

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EIB SMEs lending in Croatia in 2013

EIB Loans for SMEs and midcaps o EUR 550m to finance projects promoted by small and medium-sized enterprises and

midcap companies in Croatia EIB credit lines were provided to HBOR, Raiffeisen Bank and Raiffeisen Leasing

EIF in Croatia

EUR 5.2m for guarantee transactions enabling EUR 26.2m of new loans for SMEs;

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JASPERS - Joint Assistance to Support Projects in European Regions

A Technical Support Facility, managed by the EIB, and co-sponsored by the EC, EIB, EBRD and KfW, helping to absorb EU Structural and Cohesion Funds Assistance provided free of charge by the EC and the EIB Croatia is the first country that benefitted from JASPERS prior to joining the EU In Croatia:

up to the end of 2013 JASPERS completed 15 projects with estimated total value of some EUR 523 million Currently JASPERS deals with 91 active projects with estimated total value of some EUR 6 billion

Sectors concern notably water /waste, public transport, roads, knowledge economy, energy

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Prospects for a even stronger involvement

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• Co-financing of EU funds • Key target sectors: sustainable transport (roads, rail and municipal transport);

water & environmental protection; rural development; • Urban renewal and JESSICA

• Skills and Jobs /Competitiveness: EIB is appraising a EUR 160 m loan to support investment in university infrastructure in Croatia

• Access of SMEs and Mid-Cap companies to long term finance: • Two new credit lines with HBOR amounting to EUR 400m to be signed today, • New credit lines with other intermediaries in Croatia are in the pipeline

• SME initiative and focus on credit guarantee schemes • Competitive energy and energy efficiency