Country Risk Rating

A4
A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still 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 Western European markets
  • Price competitiveness, qualified and cheap labor force
  • Integrated into the German production chain
  • Diversified economy (agriculture, variety of industries, services)
  • Resilient financial sector

Weaknesses

  • Inadequate level of investment; domestic savings rate is too low
  • Weakness in R&D; high content of exports in imports
  • Developmental lag in Eastern regions
  • Structural unemployment, low level of female employment

Current Trends

The recovery delayed by the second wave of the pandemic

Poland, which remained relatively resilient to the financial crisis of 2008/2009, suffered much more from the COVID-19 pandemic this time around. A fall in demand and the restrictions imposed during the first wave of the pandemic led to a significant drop in household consumption, which remains a crucial part of the economy (58% of GDP). Just in the first half of 2020, household consumption decreased by nearly 5% year-over-year, while public consumption, supported by extraordinary spending, was the only component that increased steadily whilst the economy was hit by the pandemic. The third quarter had ignited the hope that a straight way to recovery was ahead, but the second wave of the pandemic reversed this scenario. The labor market has not suffered significantly thanks to the implemented support measures, such as the short-time work scheme that includes standstill allowance. However, unemployment did increase, reversing the continued downward trend observed since 2013. This puts pressure on the further dynamics of household consumption, which are likely to be limited by low confidence amid pandemic-related uncertainty, lower employment and a higher propensity to save. On the other hand, lower employment reduced the tightness of the labor market due to mounting labor shortages. Fixed asset investments are going to be reduced because companies are still facing a higher level of uncertainty and a drop in their capacity utilization induced by lower demand. As expressed in surveys, firms from various sectors reduced their investments in 2020, with the largest slumps being reported by the construction and retail sectors. Investments are expected to rebound later in 2021, when the economy will be gradually recovering. Nevertheless, the improved economic activity would result in the phasing-out of support measures, which should lead to higher unemployment and growth in business insolvencies. Investments will benefit from the EU structural funds and the new Next Generation EU fund aimed at tackling the negative economic consequences of the COVID-pandemic. The former is the equivalent of 19.2% of GDP to be received in 2021-2027, while the latter totals 12.1% of GDP.

 

The budget deficit widened significantly

After the relatively low budget deficits recorded in 2018 and 2019, public finance balances have widened due to the pandemic and the measures implemented to contain its effects. Lower tax revenues and a strong increase in expenditures contributed to the deficit. In 2021, the budget deficit is expected to shrink thanks to the recovering economy and phasing-out fiscal measures. However, it is not expected to return below the 3% of GDP threshold level before 2023. The current account balance had turned positive in 2019, and is estimated to have remained in that area in 2020 thanks to trade in services - which has continued to post the largest surplus and was supported by transportation services abroad - and trade in goods. Despite the contraction of demand on external markets at the peak of the first wave of COVID-19, Polish exports rebounded relatively fast thanks to their competitiveness and their inclusion in supply chains. With an expected revival of global trade in 2021, exports are likely to drive the balance of goods even more, but rising imports supported by the recovery will limit the contribution of net exports to GDP growth.

 

The governing party extends its lead

The ruling right-wing party Law and Justice (PiS) had narrowly won a second term in office in the latest parliamentary elections held in October 2019. However, its grip on power weakened after it lost control of the upper house (Senate) and failed to increase its absolute majority in the more powerful lower chamber (Sejm). Moreover, tensions in the coalition erupted in 2020 when the junior parties, United Poland (SP) and Agreement, refused to back legislation proposed by the PiS. This resulted in a cabinet reshuffle. In late 2020, the government faced mass protests after it had asked for the Constitutional Tribunal’s decision that declared most abortions illegal, while abortion laws in Poland have already been among the strictest in Europe. The support for the party has dropped even though it could gain more Catholic and right-wing voters. Before this, the incumbent president Andrzej Duda, who originated from PiS, secured a second term in office after the second round of the presidential election that was held in July 2020.

Source:

Coface (02/2020)
Poland