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. - Source: Coface

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.

Strengths

  • Market of 38 million people
  • Proximity to West European markets
  • Price competitiveness / qualified and cheap labor force
  • Integrated into the German production chain
  • Leading beneficiary of European structural funds
  • Diversified economy (agriculture, variety of industries, services)
  • Resilient financial sector
  • Coal reserves

Weaknesses

  • Inadequate level of investment / Domestic savings rate too low
  • Weakness in R&D
  • Developmental lag of Eastern regions
  • Rigidity of the labor market encouraging informal economy
  • Structural unemployment and low level of female employment

Current Trends

The Growth Peak Has Been Passed

Although Poland is expected to record a solid growth rate in 2018, it will likely be a slower expansion than that of 2017. A rebound of investments experienced last year was gradual. This has so far been predominantly fuelled by higher public investments, especially at the municipal level.

Household consumption remains the main growth driver, thanks to the buoyant labor market. The unemployment rate is the lowest in 27 years, wages are set to keep growing at fair rates, the central bank’s rate is at its lowest point in history, and consumer sentiment indicators have broken new heights. Exports (automobiles, machines, white goods, consumer electronics, food, and furniture) are expected to benefit from the continued recovery in global trade and higher demand in the country’s leading markets (Eurozone countries). However, as imports – driven by increased consumption – will increase faster than exports, the contribution from foreign trade to growth is likely to be negative.

Although the labor market situation is beneficial for households, companies have perceived it as a constraint. Labor shortages have become a barrier to current business activity and its further expansion, and have been reported by an increasing number of companies across all sectors. A lack of workforce is especially evident in the construction sector, which means that its gradual recovery is likely to be limited. The tightness of the labor market will continue to affect businesses in Poland, and it remains one of the factors making a further boost of growth impossible. In addition, the insolvency law enacted in 2016 has favored the increase in business insolvencies in 2017.

Social Measures are Expected to Widen the Budget Deficit

After having narrowed to 2.4% in 2016 – its lowest level since 2007 – the general government deficit has remained stable in 2017, supported by reduced investment activity of public entities in a period of switching to a current EU financial perspective. Although improved tax collection has brought sizeable and positive effects to the Polish budget balance, this has been offset by costly social measures, such as child benefits and the lowering of the statutory retirement age in 2017. An extension of higher VAT rates’ validity has generated additional revenues, but the government is likely to look to implement further measures. The introduction of the retail distribution tax, revised downwards under pressure from the European Commission, was initially delayed until 2018 and then to 2019. The government has also expressed intent to abolish the upper limit on pension contributions and therefore increase revenues of the Social Security Fund. Nevertheless, the public deficit is not likely to break the 3% threshold, and avoiding falling within the remit of the European Excessive Deficit Procedure remains a priority.

Deterioration of the Political and Social Situation

The conservative Law and Justice (PiS) party won a majority of seats in the Sejm (the lower house of Polish parliament) in the legislative elections of October 2015, with 37.6% of votes, ahead of Civic Platform, the main opposition party. Its leader, Jarosław Kaczyński, gave the post of Prime Minister to Beata Szydło – moderate in image, but with significant influence over the government agenda. Since taking office, the PiS conducted a series of disputable reforms that have undermined the country’s democratic institutions and worsened the relationship with the EU. The European Commission has triggered Article 7 of the Union Treaty which could provide for the suspension of certain rights, including the right to vote, in case of a clear risk of serious violation of the rule of law. Such actions have also generated social discontent within segments of the population, and have polarized public opinion. In December 2017 Deputy Prime Minister Mateusz Morawiecki, who had been in charge of finance and development policy, was nominated to become the Prime Minister, replacing Beata Szydło. The switch has not yet resulted in a change of political or economic course of the government.

Although the current government has successfully achieved a higher collectability of taxes, the political climate is relatively gloomy. It has contributed to a higher level of uncertainty compared to previous years and has also affected investors’ attitudes. On the other hand, stable fundamentals, the Polish integration into Western European chains, and attractive yields have convinced foreign entities to not withdraw their investments from Poland. Nevertheless, the increased volatility of exchange rates confirmed that political instability and policy deterioration have worsened the external perception of Poland. 

Source:

Coface (01/2018)
Poland