The impact of drawdown of EU funds on investment by non-financial corporations
This box sets out to explain the reasons for the buoyant growth in investment by non-financial corporations last year and the sudden year-on-year decline in such investment this year. This pattern has been observed in most sectors. Analyses show that co-financing from EU funds affects not only government investment, but also investment by non-financial corporations.
In the case of the Czech Republic as a small and open economy, investment by non-financial corporations can be explained in the long run largely by changes in external demand. However, the estimate of effective external demand based on the GDP of the Czech Republic’s main euro area trading partner countries, which is used to forecast private fixed investment,1 does not fully capture the swings in investment recorded over the last two years. The estimate of effective external demand as measured by imports of euro area countries has a slightly better predictive ability in this period, but even it cannot fully explain the surge in investment by non-financial corporations observed in 2015 (see Chart 1).
Chart 1 (BOX) Investment by corporations and external demand
Estimates of effective external demand based on EU GDP and EU imports cannot explain the swings in investment by non-financial corporations in 2015 and 2016
(differences from trend in %; CNB calculations)
Another explanation may be linked with the increased efforts to draw down EU funds from the previous programme period. In contrast to the forecast for government investment, where a large year-on-year swing linked with uneven drawdown of EU funds had been predicted,2 the forecast for private investment had been much smoother. However, data for 2015 on capital transfers from the government to non-financial corporations3 linked with the co-financing of investment from EU funds reveal that the amount paid to non-financial corporations almost doubled in 2015 compared to the previous year. Their share in the total allocation for the Czech Republic increased from single percentage figures to around 30% (more than CZK 40 billion in 2015).
In addition, an analysis of the data for individual projects co-financed from structural funds4 reveals that the contribution from EU funds to the value of investment may also be relatively high in the case of private investment. In the government sector, structural funds account for 82% of the value of investment on average, while the figure for non-financial corporations is 65%.
Knowledge of this ratio, combined with data on the volume of transfers from structural funds to non-financial corporations, enables us to break down investment by non-financial corporations into the part co-financed from EU funds and the part financed solely from their own resources. It is clear from this breakdown (see Chart 2) that investment financed from firms’ own resources makes up the dominant part of total investment by non-financial corporations and has been rising steadily. Recently, however, the changes in total investment have been driven to a growing extent by investment co-financed from structural funds.
Chart 2 (BOX) Investment by non-financial corporations
Investment by non-financial corporations is dominated by investment financed fully from own resources, but the proportion of investment financed from EU funds has increased
(CZK billions; current prices; source: CZSO, CNB calculations)
The decomposition of annual growth in investment by non-financial corporations (see Chart 3) confirms that the contribution of investment co-financed from EU funds was particularly dominant in 2015. Information on the gradual start to the drawdown of structural funds at the start of this year suggests that investment co-financed from structural funds is currently falling due to base effects and thus reducing the pace of growth of total investment by non-financial corporations. A return to annual growth in investment co-financed from EU funds is expected in 2017, so that this investment will once again augment the continuing growth in investment from firms’ own resources.
Chart 3 (BOX) Decomposition of annual growth in investment by non-financial corporations
Annual growth in investment by non-financial corporations was largely driven by investment co-financed from European funds
(annual percentage changes; source: CZSO, MRD; CNB calculations)
1 Non-financial corporations account for about 75% of private investment
2 See Box 1 in Inflation Report I/2016.
3 Source: CZSO.
4 Source: Ministry for Regional Development.