Justyna Zandberg-Malec

Will Poland avoid a recession?

Speakers at the 4th Warsaw CEE Financial Hub, an international conference held on 30 November 2011 at the Warsaw Stock Exchange, gave high marks to the Polish economy.

In his welcome to the conference, National Bank of Poland president Marek Belka apologised that he would violate Polish custom by delivering optimistic news. In Belka’s view, the Polish economy has not—and will not—fall into a recess, primarily because over the past decade Poland avoided the drastic increases and declines that occurred, for example, in the Baltic states. Poland is also less dependent on exports, and thus external shocks affect the Polish economy only about half as strongly as they might.

The prospects for Polish exports are nonetheless positive, mainly thanks to exchange rates, which despite significant fluctuations do not rise above a level that would make exports unprofitable. Poland’s economy has opened up extensively over the past 10 years. A decade ago, exports represented 24% of gross domestic product, but now the figure has risen above 40%. Poland’s share in total EU exports tripled in 10 years, from 1% to 3.4%, with exports by Polish firms rising just as fast as exports within international distribution chains. This demonstrates the strength of the Polish economy compared to other countries in the region, where the share in exports of domestic firms is significantly lower.

Poland has a relatively low and very stable current account deficit. The variation in this figure does not exceed 1.5%, which means that the Polish economy is more stable than others in the region. The current account deficit is also financed primarily out of the influx of foreign direct investment and EU structural funds.

The Polish labour market is one of the most flexible in Europe. Only Estonia and Italy have a less rigid wage system than Poland. On average, about a third of wages in Poland represent variable elements, which means that in case of need base wages do not have to be cut, but only certain bonuses. About 25% of employment contracts are for a definite period. They may be disparaged by staff as “garbage contracts” but they increase the country’s competitiveness.

One chronic weakness, however, is a low inclination to savings, and another is dependence on foreign capital for investments.

The dependence of the Polish enterprise sector on bank borrowing is very low, however, and is declining further (in 2010 it was 14.4% of GDP). Polish enterprises are funded to a similar degree by their parent companies—in other words, outside the banking system—but nonetheless, at 30% the total dependence on borrowings is extremely low.

Household incomes are rising, and the gap between Poland and Western Europe in this respect is narrowing. Meanwhile, the rate of return on investment in Poland remains very high.

Another strength of Poland is its constitutional checks on public debt. A debate is currently underway in the European Union on whether to introduce similar restrictions in other political systems. Poland has had limits in place since adoption of the 1997 Constitution. In terms of the size of its public debt, Poland is at about the middle of the pack among EU member states, and during the crisis public debt rose fairly little. Total state spending comes in at about 35% of GDP, which means that Poland is not overburdened by the state sector. Nonetheless, total spending on public investments in Poland is the highest in the EU. This demonstrates the country’s success at absorption of EU funds, thanks first to prevailing in Brussels in obtaining decentralisation of this process, and second to the existing budget perspectives, which enable leveraging of co-financing costs.

During the panel discussion, the question was raised how long Poland can remain an oasis in the surrounding economic desert. Sławomir Majman, president of the Polish Information and Foreign Investment Agency, pointed out that Poles are not afraid of the crisis: they continue to spend, they are not laying off workers, and net production is growing. Henryka Bochniarz, president of the Polish Confederation of Private Employers Lewiatan, took the view that Poland will continue to stand out because the fundamentals of its economy are healthy. On top of that, the economy is diversified and is not dependent on any one sector, and it receives EU funds.

Ludwik Sobolewski, CEO of the Warsaw Stock Exchange, admitted that the crisis has obviously had an impact on the Polish stock market. Poland may be an oasis, but it is not an island. The country requires injections of foreign capital. Although the international market can be fickle, the benefits of being part of it outweigh the disadvantages.

The question of Poland’s entering the eurozone also arose. The speakers agreed that it is worthwhile joining the eurozone but there is no rush. First the criteria must be met. Deputy Minister of Finance Maciej Grabowski said this could be achieved in 2–3 years. Then there will be time to consider whether the euro will be beneficial for Poland.

Sobolewski stressed that entering the eurozone will have an uncertain effect on the capital market. The equity market should react positively, but the impact on the derivatives market may be negative. He also pointed out that there are other more urgent and more difficult issues, such as pension reform. Bochniarz also called for raising the retirement age—over the objection of public opinion.

According to Sławomir Majman, for Poland to remain competitive it must first maintain economic and political stability, second, an entrepreneurial spirit, and third, its current work ethic. After Korea, Poland is now the second hardest-working country in the world. If Poland keeps its nose to the grindstone, Majman said, it will continue to be headed in the right direction.