Although ultra-right-wing critics such as Subramanian Swamy openly rejoiced, industrialists worried that Rajan’s replacement at the helm of India’s central bank would undo much of the gains the economy had made under his stewardship.

In his resignation note, Rajan, who earned an “A” grade last year in Global Finance’s annual Central Banker Report Cards, described some of the major initiatives from his three years leading RBI: establishing an inflation-focused framework, cutting 150 basis points from the interest rate, improving the balance sheets of banks through the Asset Quality Review, reforming state-run bank management appointments and restructuring the RBI.

With Rajan’s deputy, Urjit Patel, now set to take the reins, there’s a growing calm, born of consensus about the new regime: “We believe the RBI’s approach to inflation and setting of interest rates [under Patel] will not be very different from that under Governor Rajan,” said J.P Morgan economists in a recent note, “particularly now that the framework has been largely institutionalized.”

Patel, who obtained a doctorate in economics from Yale University in 1990, worked at the International Monetary Fund’s India desk between 1991 and 1994 before moving to India.

Just a couple of years ago, India was one of the “Fragile Five” economies—alongside Brazil, Indonesia, South Africa and Turkey—deemed too reliant on fickle foreign investment dollars that evaporated when developed markets strengthened. Since then, India has taken steps to strengthen its economy and enhance its appeal to investors, so that now, with inflation lower, considerable improvement in the current account deficit (now at 1%) and a solid build-up in foreign reserves, the nation stands at the cusp of reinvigorated growth.

“India is poised for a broad-based recovery,” says Hiren Ved, chief investment officer at Alchemy Capital Management in Mumbai, which offers Indian equity funds.

India remains the fastest-growing economy across Asia and the fastest-growing large economy in the world, with GDP jumping about 7%7.5% annually, according to the OECD. Low oil prices have been a helpful boost, and, along with renewed targeting from the Reserve Bank of India (RBI), have helped to reduce inflationary pressures, says Gonzalo Pángaro, lead portfolio manager for T. Rowe Price’s Emerging Markets Stock Fund and chairman of the strategy’s investment advisory committee.

Indeed, “the conditions for becoming involved in India are better than ever,” says international tax specialist Cecil Nazareth of Nazareth Consulting. The government’s willingness to enforce the rule of law and encourage foreign direct investment has brought a new wave of capital into India. Successful offerings of “masala” bonds (rupee-denominated offshore debt), a spike in cross-border M&As, and financial and legislative steps taken to boost domestic consumption and infrastructure building are the keys. With the rupee near historic lows relative to the dollar, the attraction of cross-border M&As has risen sharply.

India is “a prime target for investment” globally, notes Mark Weinberger, global chairman and CEO of EY, the global consulting firm. In the first quarter of 2016, the value of M&As involving Indian companies rose nearly 63%, to $7.8 billion, spurred by big-ticket disinvestment transactions, according to EY, in its most recent report on Indian M&A. There were 245 deals announced, compared with 219 in the same period a year ago. “Companies from the US continued to be the most active counterparts for Indian companies in the cross-border transactions,” according to EY. “During the quarter, players from the US were involved as acquirers in 10 in-bound deals and as targets in 15 out-bound transactions.”

Cyclically, India has been challenged by stalled investment cycles and anemic credit growth, but recent steps to deal with many of the negatives associated with the past cycle’s credit expansion will help the future outlook, says Pángaro. One such step is the move to establish a unified tax regime, replacing dozens of state and local tariffs with a single nationwide rate.

The latest idea from India’s Pay Commission—an intermittently appointed entity that reviews government salaries—will result in a 23.6% boost in payments to central government employees and pensioners that represents 0.7% of GDP and “should help boost domestic consumption,” says Ved. The increase is expected to spread to state governments and public-sector enterprises, along with renewed investments in roads, railways and defense. As an example of those investments, in late August, India signed the bilateral Logistics Exchange Memorandum of Agreement (Lemoa) with the US to give the militaries of both countries access to each other’s facilities for supplies and repairs. Although no financial values have been attached to Lemoa, it is expected to generate a significant windfall for defense and defense-related businesses in India. India is also attractive for ordinary investors, says Nazareth. Although fixed-income yields in the US have plummeted, CDs in India continue to offer rates as high as 10%. Even after tax considerations, Indian bonds can yield returns far greater than those in the US and Europe.

Enthusiasm for high fixed-income rates has carried over into the corporate market. Despite initial concerns that liquidity and trading issues would cloud the issuance of “masala” bonds, those fears seem to have been somewhat allayed. In July, India’s Housing Development Finance Corporation issued 30 billion rupees’ ($447 million) worth of three-year rupee bonds in London at an annualized yield of 8.33%, demonstrating the market viability of masala bonds.

The success of the Housing Development Finance offering made it possible for India’s largest power group, NTPC, to raise 20 billion rupees in masala bonds in August. NTPC added a wrinkle to the offering by labeling it “green.” NTPC, which originally looked to raise 10 billion rupees, sold five-year bonds to yield 7.48%, attracting 29 billion rupees. Sixty investors were involved, up from the 40 that participated in HDFC’s three-year deal.

A Goldman Sachsbacked investment group recently agreed to invest $220 million in Essel Highways, a domestic road construction company. Essel Infrastructure, the company’s holding group, raised another $132 million for its solar energy project platform from international investors. For the past decade or so, India has found itself drawn into a financial and trade arms race with China. But with China now facing a series of challenges, domestic and global, India may have finally moved forward.

When Andrzej Duda of the conservative Law and Justice Party was elected Poland’s president last year, it was clear that his populist platform had struck a chord with voters. Still, many worry that the cost of such populist proposals will be too high—despite Poland’s strong economy.

“Law and Justice wants more self-determination and more emphasis on Poland,” says Lucja Cannon, a former economic adviser to the Polish government and to several East European governments. “The ruling party isn’t against the direction of the economy. It just wants more political control of that direction.”

After Law and Justice finally took charge of the government in November, it made clear that it would assert greater political control over the economy. Its reforms haven’t had full impact yet. But Leszek Balcerowicz, one of Poland’s most influential economists, thinks the effects are already beginning to be felt.

“The economic policy proposed by Law and Justice and partly implemented is already weakening what is in need of repair, namely public finances,” says Balcerowicz, one of the architects of the post-Berlin-Wall Polish economy and now professor of economics at the Warsaw School of Economics. “The policy also weakens what has been strong until now, specifically the banking sector, and it weakens that which requires strengthening by reforms, namely the forces driving long-term growth of the economy.”

For all the criticism of Law and Justice, the current macroeconomic situation of Poland continues to look promising, with estimated GDP growth for 2016 at 3.7%, unemployment below 10% (low for Europe), little deflation, a projected budgetary deficit at 2.7% of GDP (below the 3% requirement), and public debt at 52% of GDP. The forecast for 2017 is not bad either—the budgetary deficit is expected to be larger, but still below 3%.

Law and Justice has made no bones about where it stands. It believes that economic policy needs to favor small businesses and families, and that foreign companies, especially banks, have had too much influence over the direction of Polish development. For many, the party’s proposals raise fears of excessive state intervention and control; political intervention and control are still grim reminders of the Soviets and the communist past.

Mateusz Morawiecki, deputy prime minister and minister of sustainable development, says the time has come for change. “A free market is key for development of the country, but mature states are able to skillfully support this free market by state policies,” he says. “We must skillfully defend against strong foreign monopolies and create internal sources of development.”

In January, S&P downgraded Poland’s sovereign credit rating to BBB+ and gave it a negative outlook, explaining “Poland’s system of institutional checks and balances has been eroded significantly” by the new ultraconservative government’s policies.

“The S&P downgrading of Poland will mean that some investors will hold back investments previously intended,” says Roman Rewald, a former chairman of the American Chamber of Commerce in Poland and a partner at Weil, Gotshal and Manges in Warsaw. “We will never know how much of this investment issue is related to the liquidation of OFE (Polish private retirement funds) taken over by the previous ruling party, a major factor in the party’s defeat in the last elections.”

Some foreign investors are not deterred. In May, Daimler announced it would build a €500 million ($565 million) Mercedes engine factory in Poland, part of its continuing effort to search for lower-cost manufacturing environments. The Daimler announcement follows investments in Poland made by Volkswagen, Fiat and General Motors.

Rewald is not surprised. Economic decisions often override political considerations. “For years, the world’s capital was doing business with the Polish communist government despite all the restrictions and civil rights violations and nationalization, which may slowly return to Poland under [the Law and Justice Party],” he says. “So, you may not see any outrageous reactions of business people to the changes in Poland.”

Maybe there will be fewer investments and contracts, but that will be very difficult to ascertain. “The inevitable marginalization of Poland internationally, and later downgrading the stature of its economy, will not happen overnight,” adds Rewald.

Balcerowicz, best known for the “shock therapy” policy that dramatically transformed the country from a moribund, centrally planned economy into a dynamic market economy, thinks that many of the new ruling party’s populist proposals, such as a lower retirement age, a radical increase of the income tax threshold, and free medications for senior citizens, cannot be sustained, and that the fallout will spread to the economy and dampen investor confidence.

The “500+” flagship program—a child benefit scheme which will give parents a monthly allowance of 500 Polish zlotys ($129) for every second and subsequent child up to age 18—will cost 17 billion zlotys in 2016, to be financed with extra income from the sale of telecom licenses and exceptionally high profit payments by the National Bank of Poland to the budget. In 2017 the program is expected to cost 22 billion zlotys—and the payoff is doubtful.

“No studies known to me confirm the Law and Justice propaganda that a lot more children will be born in Poland thanks to these billions. In the best case, the cost of each additional child will be one million Polish zlotys. Billions from taxpayers’ pockets will serve to gain votes of the beneficiaries of 500+,” Balcerowicz says. “Even if sectoral taxes (from banks and commercial firms—or even their clients) plus the better collection of other taxes were sufficient to cover the cost of 500+, there won’t be enough money for Law and Justice’s other promises—not unless Law and Justice increases the already vast budget deficit.”

But new loans will be more expensive, so the risk of disorder in Poland’s finances will increase. The already accumulated deficit and the risk of slower growth in the world economy require additional steps to rationalize the budget. And while that may achievable through a steep rise in taxes, it would hinder the growth of the Polish economy in the long run.

Global Finance: Prudential, which has over a trillion dollars in assets under management, has been increasingly active in impact investing. You’ve said the results are promising (5%–6% average annual return). What is your strategy and organization?

Ommeed Sathe: My division, impact investments, is part of Prudential’s Office of Corporate Social Responsibility. It houses an investment function, a philanthropic function and an employee volunteer function. We’re relatively unique because we have all three under one roof. Impact investment at Prudential has been around for some time. The program was formalized in 1976, and at that time it was small. We started investing about $50 million a year but began ramping up around 2010. We expect to build up a $1 billion impact portfolio by 2020.

GF: What’s the distinction between socially responsible investing (SRI) and impact investing?

Sathe: Socially responsible investing in my mind includes instruments like green bonds, ESG (environmental, social and governance) bonds. They are most of what you’ll see on the BlackRock platform (BlackRock Impact), which means they are public instruments, public bonds, etc. Typically, they are subsets of whatever exists in the marketplace. They are negatively screened: That means you take an existing product, screen out something that’s not green, and you are left with something green. Impact investing is slightly different. It’s actively seeking out opportunities that both have social impact and can be profit-making. Most of what we invest in is private—private equity, private debt, venture capital. And, unlike [with] screened products, we are going out and finding those investments. In many cases, we’re investing in businesses that wouldn’t have existed otherwise. Most of what you see in financial services is people finding investments. We are actually making them. It can mean investing in an entrepreneur. Often, we find an entrepreneur [we like] and bring others along—investors, academics, regulators—to develop the initiative.

GF: What’s the scale of SRI versus impact investing?

Sathe: Both are very, very small. If you make SRI big enough so it includes clean energy, then it looks bigger. Some people even call small-business lending part of SRI. By contrast, impact investing is much smaller but growing rapidly. The teams also are different. An SRI team is composed of fixed-income managers. Our team is composed of venture capital types, investment professionals.

GF: How would you describe the financial returns?

Sathe: We are often looking at areas that are heavily regulated, where conventional capital won’t go: charter schools, access to healthcare, lending sectors where borrowers don’t know where to turn. Many of these areas have a great deal of overlap with areas where there is maximum social impact. If you choose to go there, though, you’ll find that the investments will be in line with or outperform mainstream investments. Prudential has earned strong returns by being the first to invest in products like affordable housing that eventually crossed into the mainstream.

If Indian Finance minister Arun Jaitley’s February budget presentation is any indication of where India is headed, the country may well become the global leader in economic growth.

In a report presented to India’s parliament the day before the budget presentation, Jaitley said that India’s economy was expected to grow at a rate of more than 8% in the 2015-2016 fiscal year, while consumer inflation would drop to between 5.0% and 5.5%. The report on the state of the Indian economy also indicated that India could increase public investments and still hit its borrowing targets. The survey added, however, that the country needed to adhere to its medium-term fiscal deficit target of 3% of gross domestic product. Noting that India had hit an economic sweet spot, the report suggested that the country had room for big-bang reforms.

“We inherited a sentiment of doom and gloom. The investment community had almost written us off. We have come a long way since then,” said Jaitley.

Three days after Jaitley presented the Modi government’s budget, Reserve Bank of India governor Raghuram Rajan cut the repo rate by 25 basis points, to 7.5%, with immediate effect.

The Finance Ministry and the RBI are finally on the same page. “This makes explicit what was implicit before—that the government and the Reserve Bank have common objectives, and that fiscal and monetary policy will work in a complementary way,” Rajan explained.

The new budget calls for more than $11 billion in spending on infrastructure projects such as roads, railways, ports. And it calls for five “ultra mega” power projects to meet growing electricity demand and reduce the country’s reliance on energy imports.

Even more important, the report proposes a new set of domestic laws and measures designed to streamline economic management, steps that should make doing business in India easier and more attractive.

“The bold decisions are to bring in a much-required bankruptcy law and a higher devolution of revenues to the states, distributing 42% of revenues to states compared to 32% earlier,” says Hiren Ved, director and CIO of Alchemy Capital Management in Mumbai.

As a result, states will have larger funds at their disposal and freedom to decide on how to spend this money. Ved explains: “Hopefully, the better-run states would use these additional resources to spend on useful capex [capital expenditure], as there are limitations as to how much a top-down approach would work in a country like India, where the state governments may belong to a different political party than the one at the center.”

One important implication of this decision is that it should now be easier for the Finance minister to convince all the states to go ahead and implement the GST [goods and services tax] regime—a single tax regime across the country. “This [reform],” says Ved, “can potentially be a game changer for India over the next few years if implemented in the right manner, as optimal rates of taxes generate higher tax revenues for the government by bringing a large part of the economy into the tax net, benefiting the organized sector, lowering logistics costs, improving efficiency in manufacturing and overall ease of doing business in India.”

“If India is backing itself, foreign investors will take note,” wrote KKR principals Henry McVey and Sanjay Nayar in early March. Investors do perceive a changed environment, especially in the realm of technology and pharmaceuticals manufacturing. Cross-border technology investors, in search of large markets, have been buying stakes in Indian companies, hoping to replicate the successes of companies such as Uber, Alibaba and eBay.

The Times of India reported in February that Russian billionaire Yuri Milner’s investment fund DST Global was in talks to lead an investment of between $400 million and $500 million in Indian ridesharing app company Ola Cabs, a company in which DST invested $5 million last year. In 2014, DST also invested in a $700 million financing round in Flipkart, an online retailer. And in October, Japanese telecom and Internet giant SoftBank said it planned to invest nearly $10 billion in India over the next few years.

India’s pharmaceuticals sector has been receiving even greater attention—from private equity investors as well as multinationals. KKR, the private equity firm, announced it is planning to spend $200 million for a minority stake in Hyderabad-based Gland Pharma, a company which produces anticoagulants. Prior to KKR’s involvement with Gland, a number of large Indian generic drug companies had been acquired by global players. That list includes Daiichi Sankyo, Sanofi and Abbott Laboratories. In December 2013, Mylan, the US-based generic drugmaker, acquired Agila Specialties, a vaccine and injectables producer, for $1.6 billion.

The Modi government can certainly be credited with making the business environment more favorable for foreign investors, but the wave began well before Modi was voted into power. “The Indian economy has benefited more from global turmoil than from the new dynamic prime minister, Mr. Modi, who was elected only nine months ago,” says Karthik Balakrishnan of Globescape Capital, a Washington, DC, cross-border advisory firm.

The collapse of Russia’s economy, China’s sluggish economic growth and Brazil’s high inflation and slowing GDP growth have all played in India’s favor. “Having a floating currency, relatively transparent public markets and a democratically elected prime minister have sent India’s stock market soaring and [led to] record FDI inflows,” says Balakrishnan.

Still, India has a long way to go. Long reputed to possess some of the world’s best technology talent, it hasn’t devoted the resources to tap it. Although venture capital invested in India in 2014 rose nearly four-fold to an estimated $4 billion, most of it went to mature businesses, little to start-ups—the drivers of innovation.

And like other developing markets, India has gone through its share of investor affection and disaffection. It still has to solve some of its lingering problems—rural poverty, growing inequality, pervasive corruption. And the low base of tax collection—only 3% of India’s population pay taxes—is an ongoing concern for corporate executives who worry that their firms will continue to have to bear the brunt of financing government spending. But offsetting that is the drop in oil prices: India’s energy bill is estimated to have lessened by $60 billion, giving the country more assets available for investing.

The Institute of International Finance, which tracks global capital flows, reports that in February, capital flows into emerging markets dropped to $12 billion from $23 billion. The money flowed out of troubled economies such as Ukraine, Brazil and Thailand. But Indonesia and India stayed intact.

* Estimates
Source: GFMag.com Country Economic Reports

Bangladeshi economic growth has been strong and relatively stable. But the country has a number of business climate challenges that must be addressed before it can reach its full potential as an investment destination.

Despite continuing political turmoil and economic disruptions—many lingering from the 2013 Rana Plaza collapse that killed more than 400 Bangladeshi textile workers—the Bangladeshi economy fared well in 2014. For 2015, the picture is even rosier.

In year ended June 30, 2014, gross domestic product (GDP) grew 6%, half a percentage point higher than projected last April by the Asian Development Bank’s Outlook (ADO) 2014. And for the current fiscal year growth is projected at 6.4%, slightly higher than forecast earlier. Standard & Poor’s rates Bangladesh BB- stable, and Moody’s gives the country a Ba3 rating.

“It’s a nascent market that has tremendous potential,” says Anshuman Ray, president and CEO of 1857 Advisors, an investment advisory firm that specializes in emerging and frontier markets in Asia. “What is holding back lenders and other capital providers is the tremendous political uncertainty and confusion around business and economic policy.”

“In the real Bangladesh economy, both headwinds and tailwinds are at play,” adds Ray. Strong economic growth from diverse sectors, rising consumption and income growth are strengthening macroeconomic indicators such as exports, which now make up 17.3% of GDP; remittances, which constitute 8.6% of GDP; and foreign reserves, which cover over six months of imports. Sixty-five percent of the working population is between 15 and 64, in a population of 159 million. Of these, 22 million are available for foreign work as manpower to other countries.

There is no dearth of infrastructure capital or advice flowing in. In December the World Bank decided to commit nearly $1.1 billion for three projects in Bangladesh: $400 million in additional financing for the Third Primary Education Development Program; $375 million for the Multipurpose Disaster Shelter Project; and $300 million for the Income Support Program for the Poorest Project. Late in 2013, the International Finance Corp (IFC), a member of the World Bank Group, put together a $385 million package to support Grameenphone, the nation’s leading mobile-phone operator.

In late 2014 the IFC said it would help City Bank improve access to finance for small businesses in Bangladesh by improving the bank’s loan and risk management processes. The collaboration between the IFC and City Bank is expected to disburse 18,000 loans worth $480 million to small and medium-size enterprises. “This project will address the financial needs of the ‘missing middle,’ the segment not served by banks or microfinance institutions. City Bank is committed to filling in this important gap for rural and semi-urban entrepreneurs, who need financing to grow their businesses,” notes Sohail Hussain, CEO of City Bank.

“If Bangladesh is to attain its goal of reaching middle-income status by 2021, small businesses will be a key driver. But they first need access to a broad range of financial services,” adds Jennifer Isern, IFC manager for access to finance advisory in South Asia.

Some companies are tapping the domestic equity markets too. Western Marine Shipyards, the leading shipbuilder of Bangladesh, went public last year—raising more than $40 million. Indeed, a record total of 17 companies went public on the Dhaka Stock Exchange in 2014, raising a total of $125 million. And Ray expects a handful of new issues, such as a local billet manufacturer and a power producer, soon to hit the market.

“There is a crying need for infrastructure investing if the economy [is] to be vital and foreign and domestic investors are to be encouraged,” says Sakhawat Hossain, managing director of Western Marine. The more capital that comes into companies such as Western Marine that are building ships for international buyers, the greater the foreign exchange saved, adds Hossain.

The country is experiencing elevated investment in infrastructure—with megaprojects initiated and expected to be completed in three to five years, according to a country report by 1857 Advisors. Projects include construction of the Padma Bridge ($1.8 billion), a deep-sea port on Sonadia, the Dhaka Metro, the 1000 MW Ruppur Nuclear Power Plant and the 1320 MW Rampal coal power plant. The Padma Bridge alone is expected to add 1.2% to GDP upon completion, says the report.

Foreign direct investment is key to the economic revitalization of the country, emphasizes Ray. But for the country to reach its investment-to-GDP target of 30%—domestic investment is currently 27.6% of GDP—FDI has to reach 2.4%.

After decades in which Bangladesh relied on crony capitalists to provide the impetus for economic growth and social development—and ultimately made little progress—the country is moving toward a balanced economy. While the economy continues to rely on cheap labor for local manufacturing and for export, it is also relying on infrastructure businesses as well as such new sectors as consumer goods and pharmaceuticals.

Local cheap labor may not remain a competitive advantage for too long. Many of the large multinationals that use low-cost manufacturing facilities are under pressure from their investors and customers to explore more humane and more technological options. But for transformation to take place, there is the need for more capital.

And in Bangladesh’s uncertain political climate, the capital markets are hard to navigate. The stock market is poorly regulated and lacks transparency. Private equity firms seem to have done little in the way of growing businesses or creating jobs—or even producing replicable returns. Some banks, with the assistance of groups like the IFC, are attempting to increase access to capital.

The opportunities are increasing, says Ray of 1857 Advisors. “Now if we can only create a climate where investors can exploit the opportunities.” n

* Estimate
Source: GFMag.com Country Economic Report, IMF

When Poland’s central bank in October cut interest rates by 50 basis points to 2%, it may have signaled to many that even Eastern Europe’s strongest economy now was suffering from a slowdown, along with the rest of Europe.

But in November, amid expectations of another rate cut, the central bank stayed pat. And comments from Polish rate setters Elzbieta Chojna-Duch and Jerzy Hausner suggest that the next rate cut—much to the government’s displeasure—may not be soon.

But when the next rate cut will be and what will drive central bank policy change is unclear. “I don’t think anyone knows,” says Michal Rusiecki, a managing partner of Enterprise Investors, the oldest private equity group in Poland. “My generation and the previous one (which runs the central bank) was shaped by the experience of hyperinflation in 1990 (prices [also] rose by 70% in the month of January 1991, if I recall correctly), so deflation is something really new and alien for us.”

While the new Polish government continues to push for further rate cuts to boost falling consumer prices, its real worry may be Poland’s strong zloty. In an environment where demand for exports has weakened, a strong zloty could further dampen demand, Finance minister Mateusz Szczurek recently warned.

In 1989, after the fall of the Berlin Wall, Poland along with many countries in Central and Eastern European, was in an economic and financial shambles. But in the 25 years since then, Poland’s GDP has soared to over $510 billion.

“It’s the greatest achievement of the transition policies,” says Leszek Balcerowicz, of the Warsaw School of Economics, who was deputy prime minister between 1989 and 1991. “This extraordinary growth resulted largely from the accumulated reforms of the enterprise sector and from the macroeconomic policies (especially monetary) that prevented the emergence of boom-bust episodes,” says Balcerowicz, the architect of an economic transformation program that continues to be referred to as “shock therapy.”

Poland’s success in great part has been in its ability to reconcile the two major postulates of the eurozone recipe against the crisis: how to have both growth and fiscal consolidation, notes Jacek Saryusz-Wolski, member of the European Parliament, “without being tempted toward fiscal relaxation and without overplaying fiscal rigor that kills growth.”

But Poland’s continued growth and stability is also in great part the result of having established a banking environment and a trading platform that foreign investors and corporations were comfortable with. “The Polish government’s ability to keep the balance in macroeconomic terms so that the balance of payments did not collapse, and the convertibility of the zloty, opened up a world of opportunities to those who were willing to take the risk,” says Jan Krzysztof Bielecki, chairman of Poland’s Economic Council and prime minister in 1991. “The lunch ticket for many was privatization with well-known internationals. Those internationals who entered Poland as the first [foreign] player, they made a fortune, they bought a quite good company with a strong position in the market, so when they injected some kind of new technology and better management, they became extremely successful.”

While many of its neighbors were betting on rapid growth without controls—growth at any cost—Poland’s insistence on bringing in multinationals that were willing to invest in the domestic economy and be strategic partners continues to pay dividends even now. “Although Poland has lost some ground over the last couple of years, it is still the most attractive country for FDI [foreign direct investment] in Central and Eastern Europe,” noted consulting firm EY in a recent report.

Given the success of the first few foreign companies, recalls Bielecki, FDI inflow began growing consistently after a couple of years. “But at the beginning most [of our neighbors] were watching, in particular the Germans, who did not believe that we could do it. Have a successful transition, they said.”

“We thought the Germans would enter immediately—these are our neighbors—but no, nothing doing. Then seven years later, they changed completely their minds and they were like today: happy to buy anything,” Bielecki adds. “At the beginning, the first reaction came from American companies, giant companies, some British companies, but not from neighbors, the Germans or the French.”

Poland’s success during the years 19892004 was the result of building the institutional bases of the free-market economy. “After the accession to the EU, the model was one of intensive growth based on the influx of EU and structural funds,” notes economist Janusz Jankowiak of the Polish Business Roundtable, a think tank. In the past decade, the Polish economy has grown by 49%, compared with the rest of the European Union, which has grown by only 11%.

Now, problems in the rest of Europe are affecting Poland. “Growth in Poland will slow in the last months of the year due to a decline in exports, as demand in the eurozone slows,” the European Commission noted in a statement, adding that Poland’s economy is also being hit by the Russian embargo on food imports from the EU. Germany’s weakening economy, which accounts for 25% of Polish exports, has slowed Poland’s exports of industrial goods. And Polish food growers, who in 2013 sold over $1 billion worth of fresh produce to Russia, including 700,000 tons of apples, have been forced to sell their stock at deep discounts or stockpile, when possible.

The Commission has cut its prediction for Poland’s economic growth in 2014 from the 3.2% it forecast in May to 3%. But that still is far ahead of its 1.3% projection of overall EU GDP growth—and just 0.8% in the eurozone.

Nonetheless, domestic demand remains strong. A recent survey of loan officers by the country’s central bank, Narodowy Bank Polski, found that there was little evidence of major changes in demand for loans or in lending policies. Compared with the previous edition of the survey, there was a lower percentage of the banks that identified factors favoring the easing of lending policy toward enterprises. In particular, responding banks did not change the terms on corporate loans significantly.

Banks, however, intensified monitoring and limited credit extension to certain sectors—notably, to enterprises engaged in exports to Russia and Ukraine, enterprises that were overreliant on raw materials imported from these countries and enterprises with a substantial share of sales to those in the coal-mining industry, where a number of companies are financially distressed.

In spite of the problems that domestic coal mining faces, the Polish energy sector has just been handed a lifeline. The European Bank for Reconstruction & Development in November approved a program to help Poland switch from a reliance on carbon-intensive fuels to a more diverse, clean and sustainable energy mix. Poland estimates that it needs €10 billion ($13.3 billion) in renewable energy investments to double its renewable energy capacity to 11 gigawatts by 2030 and achieve domestic and EU targets.

The EBRD says it will support Poland’s electricity distribution network operators in building both the physical and operational capacity to connect new, renewable energy generators. That task will mean financing 500 megawatts of renewable energy capacity by 2018 and result in significant savings in carbon dioxide emissions.

Growth will continue, says Rusiecki of Enterprise Investors, which has always focused on a long-term development and investment strategy for Poland. “I believe the prospects are good if there is at least minimal political stability in Europe and Poland. I think there is hope for a more innovative generation of entrepreneurs and managers to take the economy to the next level, but they need another 10 years of stability.” n

GFmag.com Data Summary: Poland

* Estimates                                                                       
Source: GFMag.com Country Economic Reports, IMF

As partner of Strategy&, formerly Booz & Co, John Jullens has had extensive contact with the emerging markets. Now as the consulting firm’s partner based in Shanghai, he has firsthand knowledge of what is happening in the emerging markets: He advises both Chinese and multinational clients on how to cope with the changing economic landscape in Asia.

In conversation with Global Finance, Jullens expanded on his thesis that the Asian emerging markets may not be able to sustain the remarkable growth they have experienced but that they are still well positioned for sustained growth and development.

Global Finance:  Is the Asian growth miracle already over?

John Jullens: For most of the last decade, the conventional wisdom has been that we have been in a one-hundred-year process of convergence [between global markets]. After the Industrial Revolution we had a handful of developed markets and a long tail of emerging markets. We saw an increase in the convergence after World War II. But with about 13% of the world’s population living in the developed economies and 70% in the emerging countries, we are seeing a new phase of convergence. And so, since 2007 and 2008, we are seeing more [capital] flowing into the emerging markets to take advantage of this convergence.

But in the last year or so, a lot of that hot money [investment into equity markets] has flown right back out. China has slowed down. India has slowed down. And all kinds of economic and political issues have crept in [to these markets]. But it’s not really over.

The underlying demand drivers are still quite good in Asia. The demographics are good. The population continues to grow and will continue to grow. There is increasing disposable income. So there is demand for more manufactured products, more processed goods. And if the question is whether there is the organization to deliver these goods, the future of that looks very good.

GF:  What about on the supply side?

Jullens: The supply side is even more positive. The Asian Development Bank estimates that, to build out an appropriate infrastructure, you’d need about $750 billion per year. But the larger question is whether anyone will make the investments necessary. The underlying supply-chain fundamentals also are very very good.

GF: Is the easy phase of doing business in Asia over?

Jullens: There are growth traps everywhere. Countries such as India and China are caught in economic development traps. Growth strategies put in place currently are not sufficient for the next level of development. The population mix is changing. We’re seeing a population that is aging. And [these countries must address] the needs of [this changing demographic], such as healthcare. The market characteristics are changing too. We see a move from large enterprises to smaller middle-market [companies], which may [make these markets] harder for multinationals to crack.

GF: What makes the market difficult for multinationals?

Jullens: There’s a new set of buyers with a different set of needs. And there’s also a new set of local competitors. So the traditional MNC [multinational corporation] strategy of merely introducing low-cost versions of world-class products will often not be sufficient. To be successful, many MNCs will have to not only develop products in-market but also rethink their underlying business models. Even more important, locally based companies are now more competitive than ever, with better business strategies, better manufacturing processes and a far more evolved understanding of their own markets.

In what is considered a first step for even bigger foreign direct investment to Sri Lanka, TPG Capital announced in August it would invest $113 million to buy a majority stake in Union Bank, a small distressed financial institution based in Colombo. The initial investment a 70% is expected to more than help meet Union Bank’s  $76.8 million Tier 1 capital requirements set by the Central Bank of Sri Lanka, the country’s banking regulator before it take effect on Jan. 1, 2016.

The success and ease with which the deal was closed suggests that Sri Lanka is ready for foreign investors, noted TPG’s Michael O’Hanlon at the Invest Sri Lanka conference at New York’s Essex Hotel in early September. To help complete the transaction, TPG received unparalleled support and cooperation from the government and the regulators, said O’Hanlon, who noted that TPG had engineered similar deals in South Korea, deals that had greatly benefited TPG and the banks in which it invested.

At the New York conference, attended by a number of Sri Lankan listed companies and many traders and investors who focus on frontier markets, Sri Lankan monetary and financial officials emphasized the country’s current average GDP growth of 6.6% per year, one of the highest in Asia.

After years of domestic strife and economic uncertainty, Sri Lanka is making a big play for foreign investors. It already has streamlined the rules for private investment, noted Ajith Nivard Cabraal, governor of Sri Lanka’s central bank. And by bringing down inflation to single digits for more than five years–the result of a moderation in global commodity prices- and a reduction of the fiscal deficit to less than 6% for 2013–the investment climate is more favorable than ever, Cabraal emphasized.

The stock market is undervalued, noted Vajira Kulatilaka, chairman of the Colombo Stock Exchange (CSE), which sponsored the conference. The CSE is a small exchange with fewer than 300 listed companies and a total capitalization of about $22 billion, but it has recorded spectacular returns in recent years, Kulatilaka said.

Still, Invest Sri Lanka may be preaching to the wrong choir. Brokers and traders who attended the meeting said that the investment climate was still too risky for long-term investing. And lack of transparency and disclosure would make it hard for them to recommend trading in most Sri Lankan stocks. Moreover, foreigners can still only invest in Sri Lanka through special investment instruments, not directly.

What most Sri Lankan companies need is strategic investors with the capital and knowhow to manage growth and global expansion, said Saumaya Dharshana Munasinghe, executive director of Access Engineering, a publicly listed construction company with a market capitalization of about $200 million. Although increased stock trading make a company more visible, it doesn’t necessarily expand business opportunities. Companies such as Access need strategic investors who not only provide capital but also management to build the business and expand it globally, he added.

Foreign Direct Investments have always posed a dilemma for developing countries. Foreign investors want rewards commensurate to the risks of investing in unpredictable frontier markets. In the 1990s, for example, Poland – in the aftermath of the fall of the Berlin Wall– faced such a dilemma. But it attracted strategic investors who brought in new capital and management savvy and used Poland as a springboard for expansion into Central and Eastern European markets.

By allowing private equity groups such as TPG to take controlling interests in local companies, or by dealing with countries such as China that are interested in acquiring foreign assets, Sri Lanka may be solving its short-term capital requirements but not addressing its overall development needs.

Norway’s $870 billion sovereign wealth fund has always been at the forefront of ethical investing, and its actions have influenced the decision making of other asset managers, big and small. But in the area of shareholder activism the fund has been reticent about how it votes, choosing to reveal its decisions only after it has cast its ballot.

But starting next year the fund will reveal its voting intentions before shareholder meetings, not only to be more transparent but also to influence the debate and the subsequent voting. It will start with a few selected companies, and then cover all the holdings in its portfolio.

“Large institutional investors in Europe have taken the lead in shareholder activism and responsible investing,” says Martin Skancke, head of the advisory council of the United Nations Principles for Responsible Investment and a former chief asset manager for the fund. But US investors have been slow to follow, he and others say. In an age of corporate excess the public stance taken by the fund could spur a new level of shareholder activism not only among Europeans but also in the US.

In recent months the fund has taken unpopular positions, often to be proven right later. It refused to back the auditors at Bank of America, and in early August, BofA agreed to a $16 billion to $17 billion settlement on charges that it knowingly sold toxic mortgage-backed securities. The fund also voted against what it considered excessive pay packages at Goldman Sachs and Morgan Stanley. And it has voted against giant multinationals on a variety of issues, including corporate governance, accountability and labor practices. But while its votes have brought attention to the issues, they haven’t resulted in many changes. Signaling how it will vote on corporate issues and behavior should encourage other activist groups to take a stand. “This is actually quite an exciting development as it will force everyone to raise their game,” Hans-Christoph Hirt, an executive director of UK-based activist group Hermes EOS, told the Financial Times.

 The fund has always had an elaborate process for excluding bad actors from its portfolio. An independently appointed ethics council responds to complaints about portfolio companies, conducts investigations in private, invites the company to respond, then decides on its culpability. If it determines that a company is “guilty,” it conveys the decision to Norges Bank Investment Management, which manages the fund. The ethical decision-making process, while comprehensive, is time consuming and costly. It is hoped that the fund’s voting practice, while quite different in goals and strategy from that of the ethics council, will add to its stature as an activist investor.

Yngve Slyngstad, the CEO of Norges Bank Investment Management, has noted that the size of the fund means that it has to invest beyond Norway. But instead of being a passive investor simply seeking the highest returns, it felt it could be socially responsible and still optimize returns.

The fund has generated an annual return of 5.7% since 1998, when Norges Bank Investment Management was established, through the end of 2013. After management costs and inflation, the return was 3.6%. The return in dollars was 6.7%. The fund currently owns stakes in some 8,000 companies in 82 countries.