PEI: A number of institutions have recently warned of flagging growth in the region. Are changing macroeconomic prospects a cause of concern for local managers?
Rekusz: I don’t think you can analyse the economic context separately from what happened in Western Europe last year. At the beginning of 2012, there was hope that the economy would rebound; since then it has become clear that the current crisis will continue. This has obviously impacted CEE too: in Poland, for example, the GDP growth forecast for 2013 was around 2.5 percent last year, whereas now it is probably closer to 1.5 percent. Having said that, long-term prospects are actually, I believe, quite favourable. At a four or five year time horizon, the GDP growth forecasted for [CEE] is actually much higher than the rest of Europe, which combined with the fairly stable legal framework embedded in EU legislations gives us reasons for optimism.
Seewald: The region as a whole remains poised to continue down the convergence path over the next decade. However, in the short term, it is dependent on Eurozone recovery for growth. Some of the structural advantages that countries like Poland and the Czech Republic have are low current account deficits, high capacity utilisation in export-oriented industries, low yields, and favourable monetary conditions, [all of] which will help position these countries reasonably well going forward.
Siwicki: The dividing line here in CEE goes somewhere south of the Czech Republic or Hungary. The farther south you go – Slovenia being the most recent example – the worse it gets. The north of the region, by and large, is doing better. The small Baltic countries have gone through very heavy restructuring without any major social unrest, and have done very, very well since then. That is the sort of message we keep pointing out to LPs that are concerned about the region.
PEI: Does it make CEE a more risky bet than other emerging markets?
Siwicki: When you look at CEE, there is a big discussion about whether you are talking about Europe or whether you are comparing it to emerging markets. At times we regrettably find ourselves somewhere in between: unfortunately we are not this nice, young child anymore; hopefully we’re not a teenager anymore; but we’re not a 35-year-old Western European either, with an established job and predictable revenues. And being a nice-looking 25-year-old university graduate at the beginning of your professional career is not always the best place to be when talking to investors. There’s a lot of promise in terms of further professional development, but it’s not a very strong CV that you can confidently throw on a desk…
Seewald: Jacek’s analogy of a 25-year-old college graduate and the risk-reward profile that one could ascribe to the region is a good one. Central and Eastern Europe has a unique balance of strengths: elements of emerging markets in terms of potential growth and catch-up phase to Europe, and on the other hand elements of developed markets with a strong legal infrastructure and a 20-year track record in private equity. The report card is impressive and should reflect a reasonably bright future in a maturing environment.
Siwicki: Even though we are reconnecting with Western Europe, we are not starting from scratch, as opposed to emerging markets. We may have mismanaged our economies during 50 years of communism, but now we’re going back to where we used to belong. That process has gone very, very fast, and a lot has been achieved over the last 20 years compared to any other emerging market in the world. The drivers behind that are the region’s entrepreneurial spirit and its relative “greed” in terms of consumer aspirations: CEE is seeking to emulate Western Europe’s consumption patterns, with the added advantage that it uses less financial debt.