Having just returned from a week in central and eastern Europe, I thought I would share a few thoughts about one of the countries I visited, Poland. As Europe’s sixth largest economy, it is the only EU country to border both Russia and Ukraine. Yet despite geopolitical tensions in the region -- and a slow-to-no growth Europe -- the Polish economic outlook is looking pretty good.
Before the crisis, annual Polish GDP growth was around 6 per cent. In 2009, at the height of the market malaise, while EU GDP contracted by 4.5 per cent, Poland was the only country in Europe to see GDP rise – by 1.6 per cent. Current expectations are for growth of up to 3.5 per cent this year and next.
Surely growth like this should be reflected in stocks? It kind of isn’t. At least not yet. First, one third of stocks on Poland’s WIG20 index are commodity-based, and sensitive to recent fluctuations in oil and basic resources. Second, financials PKO Bank, Pekao, and PZU make up 40 per cent of the index. And finally, but perhaps most importantly, a recent overhaul of the Polish pension system allowed the state to legally take over 51.5 per cent of assets, and led to fears that the money pension funds traditionally invested in domestic equities would be scaled back drastically.
According to Grzegorz Zawada, deputy chief executive of the Warsaw Stock Exchange, this hasn’t happened. Among other things, he says, it’s because the dividend play is still very strong, at 4 per cent. Krzysztof Rybinski, former deputy governor of the Polish central bank, told me: “Poland is a real puzzle in many ways.” Given current deflation, “you would expect to see recession and stagnation. That is not the case here.” For the time being, it is “good deflation” – driven by falling oil and food prices.
So what makes Poland different? Unlike many other countries in Europe, the Polish government didn’t push through harsh austerity measures during the crisis. Instead, it cut taxes and funded public spending through foreign assistance. It also helped that a lot of economic reforms had already been pushed through after the fall of communism in the 1990s. At around half of its GDP, the country still has a low level of public debt compared to the EU average of around 90 per cent.
Finally, Poland remains outside the Eurozone. So along with a depreciation of the zloty came a boost in export values and heightened competitiveness. On the downside, at north of 11 per cent, Poland has one of the highest levels of unemployment in the EU, with 46 per cent of jobless Poles counted as long-term unemployed. To take full advantage of Poland’s economic potential, this remains the most pressing issue the country needs to deal with.
City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.