Poland

Details

Country assessments

Highlights

• Growth in Poland has slowed significantly in the past year. Constraints on public investment and weaker growth in the country’s main trading partners have set off a broader deterioration in business sentiment and have adversely impacted private capital formation.
• The resulting adjustment in the 2013 fiscal deficit target resulted in a suspension of a fiscal rule. However, other limits on debt – which come into effect at 55 and 60 per cent of GDP – remain in place. The government’s announced reduction in contributions into private pension funds, and a return of approximately half of private pensions funds’ assets into the state pension system in September 2013, will relieve some fiscal pressures, while adversely impacting the local capital market agenda.
• Privatisation volumes under the two-year programme up to the end of 2013 remain on track. However, large companies, including in the energy and mining sectors, have not yet been opened to full private ownership. 

Key priorities for 2014

• Public investment should be governed by commercial principles. The new state-sponsored infrastructure investment fund – Polish Investment – which operates through a special purpose vehicle outside of the government accounts should be closely monitored through the involvement of outside investors.
• Efforts to promote capital market development should be renewed. Recently announced changes to private pension funds will substantially diminish a major source of domestic long-term funding. Support through financial regulation could encourage the issue and trading of private bonds.
• The authorities still need to address some of the most pervasive constraints in the economy in relation to access to individual professions in Europe. This is the case, notwithstanding recent progress that enhances access to over 50 professions, such as brokers, notaries and legal advisers. Similarly, restrictions on starting a business in a number of service industries remain a significant obstacle.

Macroeconomic performance

Since the beginning of 2012, Poland’s economic growth has slowed considerably. Poland recorded annual average growth above 4 per cent in the period 2010-11, which was among the highest growth rates in the European Union (EU) over that period. This resilience was substantially due to a well-timed fiscal stimulus, as well as to efficient use of EU structural funds. Since early 2012, growth has slowed markedly, in particular due to constraints on public investment and a broader slow-down in private capital formation. Growth figures for the first half of 2013 underlined a sharp slow-down in domestic demand, as aggregate growth dropped to just 0.7 per cent in annual terms in that period, and with growth of slightly over 1 per cent likely in 2013. Although the rate of unemployment had begun to drop in July 2013, it persistently remains above 10 per cent, aggravating longstanding structural problems from low labour force participation and long-term unemployment.

As a result, the fiscal deficit continues to rise. The government has persevered with an ambitious austerity programme that was initiated in late 2011, and which included long-delayed reforms in social expenditures, including a graduated increase in the retirement age to 67. Nevertheless, given the unexpectedly sharp slow-down in growth, the budget deficit of 3.9 per cent recorded last year is expected to rise to about 4.5 per cent of GDP in 2013, according to budget amendments announced in July. Poland therefore remains subject to the EU’s Excessive Deficit Procedure, and in July 2013 the country suspended a fiscal rule that barred a widening of the deficit should public debt exceed 50 per cent of GDP (although two other rules, stipulating certain restraints should debt exceed 55 and 60 per cent of GDP, remain in place). A new rule on public expenditures and debt stabilisation is under preparation. In the short term, a renewed curtailment of transfers into private pension funds, and a shift of about half of assets under management back into the state pension fund, has emerged as a central option for fiscal consolidation.

The National Bank of Poland’s rapid loosening of monetary policy since November 2012 has emerged as the principal source of direct stimulus to the economy. The cumulative cuts in the policy rates, of 2.25 percentage points, have been warranted by a rapid fall in inflation, to less than 1 per cent in annual terms during the second quarter of this year, from 4.5 per cent in late 2011. Further stimulus was provided through a loosening of restrictions in lending to households, which was appropriate in this phase of the credit cycle. New credit extended to the private sector was minuscule, with households attracting around 1.3 per cent of GDP, while enterprises attracted less than 0.5 per cent of GDP in new credit in the year to mid-2013. The outlook for bank credit should improve, as European parent banks have eased deleveraging from the central and eastern European markets (although in the year to the first quarter of 2013 this funding withdrawal from Poland was still around 1 per cent of GDP). At the same time, domestic funding sources – in particular deposits – are rapidly growing in relative importance.

Poland has benefitted from an inflow of capital to emerging markets, as the advanced countries have eased their monetary policies. Portfolio inflows increased to 3.3 per cent of GDP in 2012. Given the significant financing needs following the 2008-09 financial crisis, the government has issued considerable amounts, in both external (Eurobond) and domestic bond markets, with the domestic government bond markets having one of the highest foreign investor participation rates of any emerging market. This exposure to foreign investor sentiment, as well as the yield differential to bond markets in the advanced economies, represents a vulnerability in principle, although Poland’s credit rating remains high (at A- with a stable outlook). At the same time, inflows of foreign direct investment (FDI), which were substantial before the crisis, fell further, to only 1.2 per cent of GDP in 2012.

Major structural reform developments

Poland’s business environment has improved, but it continues to lag regional comparators. In the World Bank 2014 Doing Business report Poland showed a slight improvement, but its ranking remains relatively low. The economy advanced three positions, to forty-fifth place of 189 countries. Part of Poland’s upgrade was due to reforms that reduced the time to deal with construction permits and simplified the property registration process. This follows a significant upgrade in 2013, when Poland showed the largest improvement of all countries in the survey, advancing by 19 places. In October 2012 parliament approved a regulation that addressed numerous issues plaguing small and medium-sized enterprises, most significantly allowing cash accounting for value-added tax payments.

The government seeks to respond to the ongoing slow-down in investment through a major state investment programme designed to revive infrastructure spending. This programme was motivated by a slowing absorption of EU funds for infrastructure spending, the downturn in the construction industry in 2012, and the need to fill gaps in long-term financing in the Polish market. The new programme, “Inwestycje Polskie” (Polish Investment), seeks to maintain investment spending without placing the ongoing fiscal adjustment at risk. The key instrument in this programme is the state-owned development bank (BGK), which is to receive from the Polish treasury Zl 10 billion (approximately €2.5 billion) in shares of the most prominent state-owned companies, which are to be used to leverage up to Zl 40 billion (€10 billion) of loans. The public funds, combined with contributions from private investors and EU structural funds, will target investments in the energy sector, such as coal-fired power plants, shale gas operations, a liquefied natural gas terminal, and road and railway infrastructure. The programme gained momentum as the first Zl 170 million (€42.5 million) BGK funding was signed in May 2013 with the Pomorskie Metropolitan Railway, to build a rail link between Gdansk’s airport and the city centre.

The government has continued the privatisation process. A privatisation plan for 2012-13 lists some 300 companies available for sale, and is projected to bring around Zl 15 billion (€3.75 billion) of revenues. For a majority of small companies in the list, the government plans on a complete exit, while for larger companies that are considered “strategically important”, the government will retain a controlling stake. By September 2013 this programme was on track, as Zl 11 billion (€2.75 billion) had been raised from 175 companies sold under this programme. However, there remain important privatisation candidates in the mining and chemical industries, and also in the potentially competitive network industries, such as Energa and Enea. Sales of minority stakes in the rail cargo company, PKP, and in Energa, are to go ahead before the end of 2013, if market conditions are conducive. In June 2013 parliament removed the state airline, LOT, from the list of companies in which the state needs to retain majority ownership.

There has been mixed progress in the restructuring of the energy market. The energy sector will require substantial investment in the coming years in order to meet EU climate change objectives. The restructuring and privatisation of the four large power companies remains a key priority. The partial sale of energy company, Energa – the country’s fourth-largest utility, with a dominant presence in the distribution market – is expected in late 2013, although the state will retain majority control. A gas exchange was launched on the Warsaw Stock Exchange in December 2012, in line with EU requirements. Although the volumes traded remains relatively small, over time this exchange may help to break the dominant position of the state-controlled PGNiG in gas distribution. The government launched a major initiative for the exploration of shale gas in 2012, which may attract more suppliers to the market, although investor commitment has been flagging, in the context of uncertainty regarding applicability of relevant regulations, and of the tax treatment for such exploration. The regulator has announced that the full liberalisation of the electricity market will be pushed back by two years, to 2015, while price settlements on the central electricity exchange remain limited to approximately 7 per cent of all transactions. A lack of integration with other markets, and the absence of financial derivatives, continues to hamper development of the market for electricity supply.

The government embarked on a partial sale of its stake in the country’s largest bank, PKO BP. The state reduced its ownership of PKO BP further, through the latest sales in January 2013, to 32 per cent. However, this did not bring significant changes to PKO BP’s management structure, as the treasury retains a controlling stake. There have been a number of ownership changes in the banking sector over the past year, most notably the consolidation of the position of Spanish Santander, which purchased the Polish subsidiary of the large Belgium banking group, KBC, and merged it with its existing stake in BZ WBK. According to statements by the regulator, given ongoing risks in Europe’s banking sector, the stability in the existing foreign ownership stakes remains a major preoccupation of prudential policy.

Poland’s debt capital markets have seen further development, but the announced scaling down of private pension funds represents a setback. There has been a significant number of new debt issues by banks and corporates, such as the retail issue of fuel company PKN Orlen. However, the private corporate bond market remains underdeveloped, compared to other emerging markets, with a capitalisation of only 2.1 per cent of GDP. The small size of many issuers, and the corresponding small issue size, is not attractive to international institutional investors. The financial markets regulator, KNF, issued a number of reports in the summer of 2013, including on securitisation and corporate bonds, in an attempt to revive regulation in support of market development. Once it is approved by parliament, the curtailment of the role of private pension funds – including the planned transfer of more than 50 per cent of funds’ assets to the state pension fund in early 2014, and strict limits on private funds’ future investment decisions – will be a setback for the development of the local capital market.

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