In 2018, economic activity in the CEE region continued the solid expansion that started in 2017. This was especially the case for Poland, Hungary and Latvia, which recorded GDP growth rates close to 5 percent. Other countries, including Romania, Estonia and Bulgaria, experienced a weaker pace of growth. Despite the differences between countries, the overall economic growth in the CEE region remained solid with 4.3 percent in 2018, after 4.6 percent in 2017.
“The main drivers were private consumption, increasing fixed asset investments as well as exports, which were less dynamic than before but still expanded, despite the eurozone slowdown,” states Grzegorz Sielewicz, Regional Economist at Coface Central and Eastern Europe. In 2018, Coface upgraded Croatia and Slovakia, following a series of Country Assessment upgrades in the previous year.
The international credit insurance company presented its eleventh annual study on the 500 biggest companies in Central and Eastern Europe – the Coface CEE Top 500. It ranks businesses by their turnover and additionally analyses further facts such as the number of employees, the companies’ frameworks, sectors and markets, as well as the new Coface company credit assessments. The economic development of the CEE Top 500 is representative of the market trend in the entire region.
TOP 500 PLAYERS: INCREASE IN TURNOVER AND RECRUITING, LOSS IN NET PROFIT
“Analyses show that the favorable economic environment was beneficial for the region’s 500 largest businesses, which translated into higher revenues,” explains Declan Daly, CEO of Coface Central and Eastern Europe. The cumulative turnover of all 500 companies increased by a solid 9.6 percent to EUR 698 billion. 78.8 percent of the listed businesses recorded revenue improvements (in comparison with 80 percent in 2017 and 63 percent in 2016).
“However, various challenges caused net profits to decrease by 1.6 percent, to EUR 30 billion. Low unemployment and declining working population trigger labour shortages, which have become a major challenge to companies in terms of daily operations and potential expansion. Not only growing wages but also rising input costs have increased companies’ operational expenditures, eroding profits as a result. Competition is getting more intense, resulting in low margins which are not able to offset higher costs,” adds Daly.
“The 2018 edition of the Top 500 CEE shows a positive evolution of the big companies operating in Romania. The main driver of this evolution remains domestic consumption, which accounts for 63 percent of the GDP. Amid the widespread improvement of the labour market, the reduction of unemployment by 4 percent at the end of last year and the increase in minimum wage in 2019 will continue to boost domestic consumption, but it is estimated to have a less accelerated rate in the next period. The lack of workforce remains a concern for companies, which puts constant pressure on costs with wages. In these conditions, big Romanian companies can benefit from a necessary momentum for development in order to reach the Top 500 CEE in large numbers, but at the same time they must be prepared for the challenges of an economic global environment that is increasingly affected by political risks,” said Eugen Anicescu, Country Manager, Coface Romania.
BIG BUSINESS IN POLAND AND IN THE AUTOMOTIVE SECTOR
Poland is home to the largest businesses in the region, with an aggregated turnover growing year by year, the recent study confirms. The top companies in the Coface publication are well known from previous rankings. Polish oil refiner and petrol retailer PKN Orlen remains unbeaten at the top with a 15 percent increase in turnover. The Czech Skoda Auto (2nd), the multinational oil and gas company MOL Hungary (3rd) and retailer Jeronimo Polska (4th) defended their positions from the previous year, all with increases in revenue.
The automotive sector remains strong in the top 10, represented by well-known brands like Czech Skoda Auto (2nd), Volkswagen Slovakia (5th) and Audi Hungary (7th). Compared to the previous year, Volkswagen Slovakia moved up the ranks thanks to a robust increase of turnover of 37.5 percent. Audi Hungary also recorded a modest 1.1 percent increase in revenues.
SECTORS: POLE POSITION FOR OIL & GAS, FOLLOWED BY STRONG AUTOMOTIVE & TRANSPORT SECTOR
The three key sectors represented by the largest companies in the region (automotive & transport, oil & gas, non-specialized trade) continue to account for almost 60 percent of the total generated revenue. However, all industries contributed to the turnover increase, with the main contributors being the energy, automotive and trade sectors.
Net profits showed a positive development only for some sectors, with rises between 4.6 percent (wood & furniture) and 41.9 percent (non-specialized trade). The construction sector was again the one that struggled the most, with a net loss of -146 percent, despite revenues increasing by 10.6 percent.
Automotive & transport lost the leading position it had in the previous year. Company revenues increased by 7.6 percent, while net profits slumped by 11.7 percent. The weaker results of the automotive and transport sector compared to the previous year reflect the global downturn of this sector. It suffers due to cyclical slowdown, increased protectionism and structural industrial changes, including investments into innovations and changes in consumption behaviour.
The third sector on the podium is non-specialized trade. Like the year before, the main driving force of CEE growth was household consumption, which accelerated further in 2018 thanks to low unemployment and growing wages. This positive impact of solid demand is dwarfed by the difficulties experienced in this sector: the increasing wages of employees and labour shortages paired with a still price-sensitive client base and high competition are exerting pressure on margins.
“Supply constraints, including labor shortages, a high capacity utilization, rising input costs, and the impact of external slowdown (direct and indirect) are all worrying companies operating in the CEE region. Household consumption is expected to remain the biggest driver of growth, although the limited acceleration of fixed asset investments and weaker exports will decrease GDP growth. Nevertheless, the scale of slowdown will be limited: Coface forecasts that the average GDP growth of the CEE region will weaken to 3.6 percent in 2019 and 3.2 percent in 2020,” adds Grzegorz Sielewicz.
POLAND ALSO LEADS IN FORTUNE 500
As Fortune Global 500 companies went out this year, it was interesting to see how many of the biggest companies in the world were present in CEE countries. According to real estate consultancy Colliers International’s latest “FDI into CEE infographic”, more Fortune Global companies located in the CEE-6 will increase demand for commercial real estate. Romania now counts 105 companies out of the global top, while Poland or Czech Republic count 139 and 111 respectively.
The number of these global majors present in the region varies from around 60 in Slovakia and Bulgaria to 139 in Poland. While Poland is the biggest economy, the ratio between Fortune Global 500 companies present and population size is much higher in Slovakia, Hungary and the Czech Republic. This correlates with the very high exports-to-GDP ratio prevalent in these three countries: 97 percent in Slovakia, 87 percent in Hungary and 79 percent in the Czech Republic. Bulgaria follows neatly on both these measures, with 65 percent. Romania and Poland have lower ratios – 42 percent and 55 percent respectively.
“The quantitative development of the real estate market came naturally as a result of Romania’s accession to the EU, but the qualitative growth is closely linked to the increase in activity among the largest and best performing companies in the world. Whatever happens over the short or medium term, given the caution regarding the global economy, over the longer term we can expect to see lower yields for office or industrial properties thanks to these bluechip tenants, which will raise the bar in the local economy,” said Silviu Pop, Head of Research at Colliers.
The analysis of FDI flows over the last decade and a half suggests high numbers of Global Fortune 500 companies from the Automotive, Industrials, Food, Beverages & Tobacco, Telecom & Media and Transportation sectors across the region. Technology, interestingly, is over-represented as well. This is encouraging for the region’s future positioning in the world economy.
Romania follows the trend, with Automotive registering the highest numbers – 14 companies – followed closely by Food, Beverages & Tobacco and Technology companies (12 both).