Euromoney’s latest risk survey has downgraded Poland again – despite its strong economic growth – as the populist-conservative government completes its third of four years in office.
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At first glance, Poland should be exciting investors.
It has racked-up strong GDP growth in recent years, with the economy expanding in the first half of 2018 at a rapid 5% in real terms.
This is lowering the unemployment rate, which eased to 3.4% on a seasonally adjusted, harmonized basis in August, according to Eurostat, with youth unemployment sliding below 10% to help strengthen social stability and the government’s finances.
Yet Poland has slipped two places in the global risk rankings, to 34th out of 186 countries, and is languishing at the bottom of Euromoney’s second-tier sovereigns:
That means Poland is low-risk and evidently a safer bet than Hungary or Romania, both roughly 12 points worse off in the survey, but riskier than Estonia, Iceland, Slovenia and Ireland higher up the scale.
The lower risk score has been driven by tightened capital access affecting other markets, a small correction to the outlook for growth, employment and government finances as trade frictions rise, and background concerns about the political climate.
One of the biggest problems concerns Poland’s relations with the EU since Law and Justice (PiS), a conservative-populist party rooted in Catholic orthodoxy, gained a majority at the last elections.
The government’s meddling in the legal system is at odds with European principles of justice, prompting the European Commission to take disciplinary action by invoking Article 7 of the EU Treaty in an attempt to suspend Poland’s voting rights.
Domestic opponents fearful of a weakening of liberal democracy have taken to the streets, but the government has majorities in both houses of parliament and does not need to call an election for another year.
Pressing on regardless, the retirement age for judges has been lowered retroactively, forcing a third into early retirement, and Poland has gained support for its actions from its like-minded partners in Hungary, with prime minister Viktor Orban’s government on a similar path, weakening the EU’s ability to respond.
In any event, PiS remains hugely popular among those benefiting from its populist spending policies who are willing to overlook interference in the judiciary for a government promising a strong economy – protecting jobs and welfare, and putting Poland’s national interests first.
The prospect of another term will continue to undermine Poland’s risk profile, which could see the country slip into the third of Euromoney’s five categories of risk level, with Lithuania and Spain only a couple of points behind.
PiS has a comfortable lead over its main rival, Civic Platform, the party once led by European Council president and former prime minister Donald Tusk, and other parties are on considerably smaller shares.
Since coming to power in 2015, only two of Poland’s political risk indicators have improved – those concerning corruption and government stability – with institutional risk and the regulatory and policymaking environment among the remainder declining.
The fiscal situation has also ameliorated under the government’s watch, but authorities are relying too heavily on strong economic growth – a cyclical improvement – without structural reform, including one-off windfalls such as central bank profit, as the Centre for Social and Economic Research explained earlier in the year.
Over-spending risks notable deterioration, when, not if, the economy slows, as it will surely do given that a tight labour market and skills shortages will curtail growth potential.
On top of that, Brexit may ultimately see a reduced inflow of EU structural funds used to co-finance investment spending, and there is always the ticking time-bomb of the global economy crashing.
Monika Kurtek, chief economist at Bank Pocztowy, is a contributor to Euromoney’s risk survey. She says the economic outlook “will not be so optimistic in the second half of the year”.
“Although consumption will remain strong, the economic slowdown in the eurozone, especially in Germany, will probably have a negative impact on exports, while investment growth is lower than expected,” adds Kurtek.
Projections released this week by the IMF show Poland’s growth slowing on a year-average basis to 3.5% in 2019 from 4.4% in 2018, with inflation expected to rise to 2.8% from 2%.
Longer-term, Poland faces other challenges stemming from the ageing population and lowering of the retirement age – one of the government’s populist policies, which goes against the requirement for longer-term fiscal sustainability.
Poland’s score for demographics, one of four structural risk indicators, has been downgraded this year in Euromoney’s survey, and is the only one scoring less than half the maximum points available.
That’s not all, as Kurtek explains: “The low investment rate is also worrying. It is still below 20%, with private investments lagging public investments supported by EU funds.”
A government rolling back democracy and controlling the judiciary will struggle to be innovative and competitive, especially in light of the ‘brain drain’ in recent years, says one contributor responding anonymously.
Others point out that regardless of Brexit, Poland can expect a reduction in structural funds flowing from the EU’s budget for 2021-2027 if it does not change course.
The problem is no one expects it too, and another term seems all but guaranteed.