INVESTORS CONFIDENCE INDEX FOR LITHUANIA (10), QUARTER II, 2017

Transcription

1 INVESTORS CONFIDENCE INDEX FOR LITHUANIA (), QUARTER II, 017 The Investors Confidence Index for Lithuania (ICIL) reflects attitudes and expectations that the largest foreign capital businesses operating in Lithuania have for the country s business and investment climate. The purpose of the index is to evaluate the country s business environment and the attractiveness of Lithuanian economy to foreign investors based on the experiences and observations of market participants already operating in Lithuania. The index consists of three indicators that provide an overview of the business environment, factors that influence business and investment plans of companies operating in the country. When measuring ICIL, priority is given to adequate and relevant information that reflects real market trends. With this in mind, only the heads of foreign companies and top tier management are invited to participate in the survey. This quarter ICIL study s methodology has been upgraded. Additional options were added to questions and evaluation scales were enlarged. Final results have been adjusted to previous ICIL index results. The ICIL survey is carried out by Investors Forum, an association of Lithuania s largest investors. A total of 1 Lithuania s foreign capital businesses participated in this quarter s survey. ICIL also serves as a tool for identifying the most influential factors that shape these conditions. It provides potential investors and other stakeholders with principal information about Lithuanian economy, national market and short-term prospects for business development. Index value Interpretation ICIL= (maximum value) ICIL >1 All participants indicate positive expactations (absolutely positive expectations). The percentage of participants with positive expectations exceeds the percentage o respondents with negative expectations. ICIL =1 Equal numbers of participants indicate positive and negative expectations. ICIL <1 The percentage of participants with negative expectations exceeds the percentage of respondents with positive expectations ICIL =0 (minimum value) All participants indicate negative expectations (absolutely negative expectations). Contact: Junior Analyst Mantas Šnioka Investors Forum info@investorsforum.lt Fig 1. Index values and descriptions 1

2 SUMMARY AND CONCLUSIONS THE TH ICIL SURVEY: AFTER THE END OF ELECTION PERIOD ICIL REACHED RECORD HIGH VALUE ICIL 017, II Q. = 1,303 ICIL Q 01 Q3 01 Q 015 Q1 015 Q 015 Q 01 Q1 01 Q 017 Q1 017 Q Fig. ICIL dynamics, ICIL 017Q Investors Confidence Index for Lithuania (ICIL) 017 second quarter value reached record high results - 1,303 ( max) value. increase in demand of their products and services. As an addition to standardized index questions this quarter we have provided a possibility for foreign investors to evaluate efficiency of Lithuania s public institutions and give their own insights about ideas which could improve business climate in Lithuania. As in the last quarter Fire and Rescue Department remained as the most efficient institution according to the investors. One of the main reasons why ICIL sky rocketed was the highly favorable evaluation of political stability in Lithuania - 3% of respondents said that it is high. Moreover, newly published Lithuanian government s action plan had huge influence and as a result of investors are expecting an

3 INVESTMENT ENVIRONMENT IN LITHUANIA: ON THE ONE HAND - HIGH EXPECTATIONS, ON THE OTHER HAND - PROMISES HAVE TO BECOME REALITY highest difference between positive and negative evaluations was expressed in business regulation area. This gap is 7%. of respondents believe that scientific research level in Lithuania is low or very low. Scientific research levels are also measured by the Good country index1. During the past two years (01 01) Lithuania has improved its position in the list by only one position (from 5th to th) Despite the fact that evaluation of current investment environment is significantly high, final results have not become predominant yet. Major factor for such positive result was the end of political election period. Furthermore, positive appraisal in this field has increased by 5 p.p. The comparison of this quarter s results with previous index outcomes (since 01 second quarter) show huge improvement. This quarter s survey indicated that 9% of respondents point out Lithuania s level of telecommunication as high or very high. 77% of investors evaluated country s transport and logistics category s level as high or very high and % of foreign investors named Lithuanians knowledge of foreign language level as high or very high. During this quarter, the level of efficiency of taxation system increased by 1%, however in the context of all other categories, this area took fourteenth place. Even 3% of interviewees indicated this field s level as low or very low. The AVERAGE LOW HIGH Efficiency of Telecommunications 9% Efficiency of Transport and Logistics Infrastructure 0% Knowledge of Foreign Language 31% Ease of Getting a Credit 77% % % % Market Openness for New Investors 57% Country's / Infrastructure* 1% 57% Availability of Siutable Land/Real Estate or Office Space 3% Sustainability of Macroeconomic Environment 5% Stability of Political Environment 1% Proximity Between Productivity and Labor Costs 3% 1% Level of Scientific Research Efficiency of Taxation System 1% % 3% Efficiency of Business Regulations 3% 5% Transparency of Lithuanian Business Environment 1% % 1% 1% 3% 1% Fig. 3 - Evaluation of Current Business Environment in Lithuania, ICIL 017 Q 1 *Including Utilities Education, Health Care etc. 3

4 INVESTORS EXPECTATIONS: EFFECTIVE TAXATION SYSTEM, POLITICAL STABILITY AND SMALLER GAP BETWEEN LABOR FORCE PRODUCTIVITY AND MONTHLY WAGE INCREACE REMAIN UNCHANGED 1% % 51 % AVAILABILITY OF SIUTABLE LAND/ REAL ESTATE OR OFFICE SPACE DETERIORATE % 3 % 39 % 57 % MARKET OPENNESS FOR NEW INVESTORS % EFFICIENCY OF TELECOMMUNICATIONS Fig. - Highest Positive Investors Expectations, ICIL 017 Q This quarter s ICIL indicates that Lithuanian investors expect most progress in availability of suitable land, real estate and office space. % of respondents believe that in upcoming quarter we will observe considerable supply in this area. However, more than half () of interviewees not only doubt of such improvement, but expect decline in this field. of foreign business representatives believe that upcoming quarter will be more open for new foreign investors in Lithuania. It is likely that such opinion has been influenced by the publicly announced government s plans to improve country s ranking in Doing Business index and fruitful Invest Lithuania performance in the field of attracting FDI. Moreover, taking into consideration all previous indexes, this quarter s results in telecommunication field gathered most positive expectations. This quarter 3% of respondents indicated expectations that the situation will improve, while previous quarter there were only 1%. Confidence rise by 15 % is the highest improvement since the beginning of this research. INCREACE Availability of Siutable Land/Real Estate or Office Space Market Openness for New Investors Efficiency of Transport and Logistics Infrastructure Efficiency of Telecommunications Efficiency of Business Regulations Level of Scientific Research Transparency of Lithuanian Business Environment Ease of Getting a Credit Proximity Between Productivity and Labor Costs Country's / Infrastructure (Including Utilities Education, Health Care etc.) Efficiency of Taxation System Sustainability of Macroeconomic Environment Stability of Political Environment Knowledge of Foreign Language REMAIN UNCHANGED DETERIORATE % 3% 57% % 3% % 1 13% 0% 31% 5% 7% 7% % 7% % % 7 77% 1 1% 0% 70% 1 1 Fig. 5 - Investors Expectations for 017 Q, ICIL 017 Q

5 Despite the fact that this research s overall results indicate significantly positive outcome, some areas lack effectiveness. Special attention was drawn to the taxation effectiveness. 0% of respondents expressed negative expectations. Another area that was emphasized was the difference between average salary growth and the working force productivity growth. Three quarters of respondents do not expect positive changes in this area. PRODUCTIVITY GROWTH ESTONIA % AVERAGE MONTHLY WAGE LATVIA % Fig. - Difference Between Labor Force Productivity and Average Monthly Wage3 in Estonia, ICIL 017 Q Fig. 7 - Difference Between Labor Force Productivity and Average Monthly Wage5 in Latvia, ICIL 017 Q One of the most effective ways to reduce the difference between productivity and average salary are flexible labor regulations. According to World Bank Doing Business index Lithuania is ranked in the last position among other Baltic region countries in the field of flexible labor regulations. Biggest Lithuania s investors agree that labor regulations in Lithuania need more attention. % of respondents indicated labor regulation as the pressing issue. Concerns in this area increased by 3% since previous ICIL study. Such results indicate investors concerns that the new Labor code would get approved as soon as possible. (fig. 9). 01 LITHUANIA % Fig. - Difference Between Labor Force Productivity and Average Monthly Wage7 in Lithuania, ICIL 017 Q LABOR & EMPLOYMENT REGULATIONS AS MOST ATTENTION REQUIRING FIELD 3% 0% 7% % % % 50% 01 Q 01 Q3 01 Q 015 Q1 015 Q 01 Q1 01 Q 017 Q1 017 Q Fig. 9 - Labor & Employment Regulations as the Most Pressing Issue in Lithuania, ICIL 017 Q 3,5,

6 According to foreign investors education system in Lithuania also raises major concerns. More than a half (5%) of respondents stated that a reform in this field is a must. Furthermore, talent migration problem has been indicated as the third area in Lithuania s economy that requires the most attention. As a result, even 3% of respondents expressed their concerns about countries demographics. Investors indicate dual citizenship as one of the potential steps to solving this problem. 1% of respondents that such measure would have a strong positive effect on the economy (fig. 11). 3% % 3 1 5% 3% 1% % Labor and Employment regulations Education 3 Talent migration Efficiency of public sector 5 Transparency Taxation system 7 Permits and Construction regulation Corporate legal regulation 9 Transport and Logistic infrastructure Energy market Fig. 017 Q Most Attention Requiring Fields, ICIL 017 Q INVESTORS FUTURE PLANS: NEW JOBS & HIGHER WAGES Respondents who expect higher profits decreased by 11% since last ICIL research. However, investors plans for second quarter remain ambitious. While carrying their strategic plans in upcoming quarter 7% of foreign investors are willing to employ new workers. This indicator reached record high value compared to all previous results. Business expectations towards demand for products and services have increased by % since 017 first quarter. Furthermore, two thirds of respondents (7%) in the second quarter plan to raise salaries for their employees. INVESTORS PLANS FOR 017 Q 3% 9% 9% 9% % 1% % % EXPORT ORDERS OF YOUR COMPANY DECREACE PROFITABILITY OF YOUR COMPANY CAPITAL INVESTMENT REMAIN UNCHANGED % 7% 7% 3% 31% 33% 3% NEW INVESTMENTS DEMAND OF YOUR COMPANY'S PRODUCTS/SERVICES 3% NEW WORKPLACES EMPLOYEES SALARIES NEW EMPLOYEES Fig Investors Plans for 017 Q, ICIL 017 Q INCREACE

7 ADDITIONAL QUESTIONS: In the second quarter of this year investors have been asked to assess the state s institutions and ministries performance efficiency. Moreover, we asked to evaluate current law projects and to express views on the proposals, which could improve the investment environment in Lithuania. ASSESSMENT OF GOVERNMENT INSTITUTIONS: STATE FOREST SERVICE - AT THE END OF THE LIST Recent ICIL study provided a possibility for investors to evaluate governmental institutions efficiency. Results indicate that the most effective institution is the Fire and Rescue Department. 73% of business representatives expressed their favorable opinion towards this institution. Moreover, by comparing this quarter s results with previous, an increase of % can be seen. Energy Distribution Operator has been indicated as second most effective government institution. Almost two thirds (%) named this institution s efficiency as high. Another important aspect is that the mean of all government institutions has increased by p.p. 7 % of respondents express their support towards forestry reform, and it might be one of the reasons why State Forestry Service ended up as the most ineffective institution (fig. 1). Furthermore, this institution had biggest decline in efficiency evaluation among other institutions. Since previous study, evaluation of State Forest Service dropped by % National Land Service and State Land Fund were also listed at the end of the list with 0 and percent. INSTITUTION EFFICIANCY EVALUATION 73% 017 Q1 3% 5% 5% 57% 5% 5 5% 5% 50% 50% 9% % STATE LAND FUND LITHUANIAN LABOUR EXCHANGE MIGRATION DEPARTAMENT STATE SERVICE FOR PROTECTED AREAS DEPARTMENT OF CULTURE HERITAGE STATE TERITORIAL PLANNING AND CONSTRUCTION INSPECTORATE NATIONAL PUBLIC HEALTH SERVICE THE ENVIRONMENTAL PROTECTION AGENCY STATE FOOD VETERINARY SERVICE CUSTOMS OF THE REPUBLIC OF LITHUANIA SOCIAL INSURANCE STATE LABOUR INSPECTORATE INVORMATION NON-FOOD INSPECTION STATE ENERGY INSPECTORATE STATE TAX INSPECTORATE CENTER OF REGISTERS ENERGY DISTRIBUTOR OPERATOR FIRE AND RESCUE DEPARTAMENT % 0% 3% STATE FOREST SERVICE 3% 017 Q NATIONAL LAND SERVICE % Fig. 1 Evaluation of Institutions Efficiency, ICIL 017 Q * The higher the estimate the more favorable the institution is 7

8 EVALUATION OF THE GOVERNMENT, PARLIAMENT AND NATIONAL AUDIT OFFICE OF LITHUANIA: HEALTH MINISTRY S INITIATIVE TO INTRODUCE ALCOHOL SALE RESTRICTIONS CAUSED NEGATIVE OVERALL EVALUATION This quarters ICIL study was supplemented by the evaluation of Lithuanian Government, Parliament and National Audit office of Lithuania. Despite the fact that mean of all institution efficiency reached 53%, the difference between most positively and negatively evaluated institutions was quite high 3%. According to investors Ministry of National Defense is the most efficient. 7% of respondents agreed on this. Ministry of Foreign Affairs was named as second leading institution. Third place has been taken by National Audit office of Lithuania as it gathered more than two thirds of respondents support. Government takes seventh position in the ranking list. Its result is one percent lower than the mean of all evaluated institutions. Furthermore, only 3% of investors believe that Lithuanian Parliament woks efficiently. 9 % of respondents disagreed with the idea of separating alcohol shops from super markets (fig. 1). LITHUANIA'S GOVERNMENT, PARLIAMENT & NATIONAL AUDIT OFFICE EFFICIENCY RESULTS INSTITUTION'S EFFICIENCY 70% MEAN 1% 53% 5% 50% 9% % % MINISTRY OF JUSTICE MINISTRY OF ENVIRONMENT MINISTRY OF EDUCATION AND SCIENCE MINISTRY OF ENERGY MINISTRY OF SOCIAL SECURITY AND LABOR MINISTRY OF CULTURE MINISTRY OF INTERIOR LITHUANIAN GOVERNMENT MINISTRY OF TRANSPORT AND COMMUNICATION MINISTRY OF FINANCE MINISTRY OF ECONOMY NATIONAL AUDIT OFFICE OF LITHUANIA MINISTRY OF FOREIGN AFFAIRS MINISTRY OF NATIONAL DEFENSE % 1% 3% 33% MINISTRY OF HEALTH % LITHUANIAN PARLIAMENT 71% MINISTRY OF AGROCULTURE 7% Fig Lithuania's Government, Parliament & National Audit Office Efficiency Results, ICIL 017 Q * The higher the estimate the more favorable the institution is

9 MOST RELEVANT AMENDMENTS NEITHER AGREE, NOR DISAGREE DISAGREE AGREE 9% INTRODUCTION OF SUGAR TAX MERGER OF STATE OWNED ENTERPRISES (SOE) 3% % FORESTRY REFORM 3% MERGER OF STATE OWNED UNIVERSITIES % 9% SOCIAL SUBSIDIES BASED ON BASIC NEEDS 7% 30% INTRODUCTION OF SEPARATE ALCOHOL SHOPS EXTENSION OF HIGH SCHOOL ACADEMIC YEARS 7% GOVERNMENT ADMINISTRATION REFORM 1 3% 1% % 0% 77% 1 79% % 1% Fig. 1 Evaluation of Most Relevant Amendments, ICIL 017 Q CASE STUDY: MOST IMPROVEMENT IN THE INVESTMENT ENVIRONMENT WOULD COME FROM COMPETITIVE EDUCATION SYSTEM The Organization for Economic Co-operation and Development (OECD) (00) indicates that foreign direct investment is one of the main factors for higher salary in most of the sectors9. Therefore, to increase a well-being in Lithuania, new FDI is a must. Moreover, according to foreign investors in Lithuania a supply of high quality working force makes a country more attractive for investors from abroad. Even 9 % of respondents agree that having at least one university in top 50 world rating would increase inflows of FDI. 7% of respondents believe that workers with blue card would help in solving the problem of shortage of qualified labor force in Lithuania. Moreover, 9 % of investors would recommend Lithuania for newcomers if workforce taxation would be lower. However, mandatory military service would create more negative than positive aspects to economy s image. Final survey question asked business community whether they see this whole package of ideas (fig. 15) improving or deteriorating the economy. 95 % of investors agreed that business environment would improve in case of all ideas being implemented. NEITHER POSITIVELY, NOR NEGATIVELY NEGATIVELY POSITIVELY % AT LEAST ONE LITHUANIAN UNIVERSITY IN GLOBAL TOP 50 11% REDUCTION OF WORKFORCE TAXATION MOST FLEXIBLE LABOR REGULATION IN EUROPE 13% ATTRACTION OF HIGHLY QUALIFIES LABOR FORCE FROM NON EU COUNTRIES 13% 9% 9% 1% DIRECT AND BUSINESS FRIENDLY AIR CONNECTIONS TO EUROPEAN BUSINESS CENTERS 7% 3% INCREASED GOVERNMENT INCENTIVES FOR NEW FDI 7% SOCIAL SECURITY CONTRIBUTION CEILINGS % 33% VILNIUS - MOST TOLERANT CITY IN EU 7 3% INCREASED QUALITY OF VACATIONAL TRAINING 7% DUAL CITIZENSHIP 7% % AT LEAST 50% OF LTU ENERGY IS PRODUCED FROM RENEWABLE RESOURCES MANDATORY MILITARY SERVICE FOR EVERY CITIZEN OVERALL RESULT 5% % 1% 5% Fig. 15 Evaluation of Case Study Ideas, ICIL 017 Q 1%