Poland: Risk Assessment
Country Risk Rating
|A3||Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average.|
Business Climate Rating
|A2||The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in the relatively stable environment rated A2.|
Vigorous consumption and exportations despite uncertainties
In spite of a 0.1% GDP decline in the first quarter of 2016, growth should remain high in 2016. The dynamism of consumption will persist, supported by a 6% increase in the minimum wage in 2016, and the introduction of new allowance for families with at least two children (low-income families are entitled to the allowance also for one child). Exports (cars, machineries, domestic appliances, consumer electronics, agro-food, furniture, ships, building components) are still on an upward trend (1.2% increase between January and July 2016). Moreover, imports have decreased, along the same period, due to the weakness of the zloty. However, a strengthening of the zloty appears to occur since mid- August 2016 with an appreciation of more than 1% vis-à-vis the euro. This reversal is due to the search by investors of higher-yielding assets, such as Polish bonds. If this appreciation continues, the likelihood of deflation is strong for the remainder of 2016, which should support private consumption. By contrast, investment felt by 1.5 % during Q1 2016 due to the transition between two European funding programs. Investors may remain cautious faced with uncertainty regarding the Brexit and some initiatives initiated by the new government from the conservative Law and Justice Party (sectoral taxes, overhaul of the pension system). Brexit effects were felt the day after the referendum results were released, with the zloty depreciating 3.5% vis-à-vis the dollar. Indeed, United-Kingdom and Poland have a strong business relationship: 7% of polish exports go to the British island (around 2.5% of GDP). Moreover, 800,000 polishes currently work there, among which half would be able to claim for British nationality in accordance with British current legislation. Finally, Poland is the country benefiting most from EU structural funds (82.5 billion euros between 2014 and 2020, that is 46.4% of the budget dedicated to Central Europe), thus it could suffer from the impact of the British departure on European budgets. Moreover, reform aimed at converting in domestic currency housing loans denominated in Swiss francs which was initiated by the previous government, but postponed until 2017, could weigh on credit. So far the cost for banks of the law expected to be introduced soon and focusing on the repayment of excessive exchange rate spreads is estimated at 1/3 of their profits in 2015.
An expansionist fiscal policy could undermine public accounts
The public deficit should widen slightly in 2016. Indeed, government expenditures are likely to rise with the increase of the income tax exemption threshold and the implementation of “Family 500+”, new child benefit program, for which the estimated cost is around 0.9% of GDP. Moreover, the increase in payroll is likely to continue with the increase of the minimum wage. In addition, government plans to reform the pension system by lowering the age of retirement and encouraging polish to transfer their private savings from private funds (OFE) to either a Worker’s Capital Plan (PPK) or an individual retirement account (IKE) managed by the state insurer, PZU. However, government also plans to finance those expenditures with additional earnings: tax on banks (0.44 % of assets) that are 60% held by foreigners and tax on distribution groups having a turnover of more than 1.5 million, also mostly held by foreign interests.
External accounts almost balanced
The balance in the trade of goods is oscillating around equilibrium, while the services balance shows a slight surplus (of about 2% of GDP) thanks to tourism and international road transport, just like remittances resulting from the increased presence of Polish workers in Western Europe. By contrast, the income of investment balance is running a deficit. The slight current account deficit is amply funded by European structural funds, while new foreign direct investments contribute the equivalent of 2% of GDP, bearing a witness of the country's involvement in the European production chain. External debt represents about 70% of GDP. 43% of the total corresponds to government liabilities, 40% to business liabilities and the remainder to banks’ liabilities to their parent companies. Over half is denominated in euros.
Tension between the government and the European Commission
Following the adoption of the law dealing with the Statute of the Tribunal Polish Constitutional Government by the Polish parliament on July 22nd, the European Commission adopted a recommendation on July 27 in which it sets out its concerns about the maintenance of the rule of law and makes corrective recommendations. If Poland does not take into account those recommendations within three months, the Commission may adopt sanctions against Poland under the Article 7 of the EU Treaty that would block the voting rights of Poland in the European institutions.