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
  • Diversified economy (agriculture, variety of industries, services)
  • Resilient financial sector

Weaknesses

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

Current Trends

Weaker growth ahead

In 2020, Poland is expected to experience a further deceleration of growth, after a slowdown perceived in 2019. Nevertheless, the growth pace is likely to remain at solid levels. It will be again supported by domestic demand, especially household consumption (59% of GDP), which remains the main growth driver. Consumer spending benefits from a number of factors: the unemployment rate reached the lowest level in the last 30 years, wages are set to keep growing at fair rates (enhanced by a series of substantial minimum wages hikes), the central bank’s rate is at its lowest point in history, consumer sentiment indicators remain on high levels, and there are fiscal stimulus measures, including the extension of child allowance program. Nevertheless, room for further acceleration of household spending is limited after its expansion in previous years. Specifically, an increase of inflation will make wage growth less robust in real terms. Prices are likely to exceed the central bank’s inflation target in the first quarter of 2020, being fuelled by further growth of food prices and a possible increase of electricity prices. However as it will be temporary, the leading interest rate is expected to remain at its current level.

Fixed asset investments will contribute to growth but less than household consumption. Although companies are likely to invest in expanding their capacities, it mostly applies to large companies, which are often local entities of foreign businesses that still benefit from attractive labor costs in Poland despite their increase during the last years. Net exports will be a drag on growth with solid imports and concerns on export dynamics. Although the latter remained in positive areas, it already started to suffer from a lower demand in the second half of last year, especially in Germany, which remains the crucial export destination. Possible disruptions in global value chains could affect Polish producers that are widely integrated into them.

Labor shortages are likely to ease, facing lower demand expectations. However, a lack of workforce will be still an important obstacle for businesses. They are especially evident in the manufacturing, construction and transport sectors.

The budget nearly balanced despite social measures

The general government deficit has remained relatively low since 2017. It is estimated that it reached 1.0% of GDP last year. Costly social transfers, including child benefits and an increase of pensions, are going to be offset by social contributions and direct taxes revenues thanks to the favorable labor market and solid growth. Although the idea of removal of the payment cap on social contributions seems to have been abandoned, an increase in excise duties is still scheduled to be introduced in 2020. Moreover, this year’s budget will benefit from one-off revenues, including a conversion fee from the transformation of the pension fund as well as sales of telecommunication frequencies and CO2 emission certificates. The government assumed that the budget will be balanced this year, but such an assumption could be overoptimistic. The general government debt remains on a manageable and declining level, below 50% of GDP.

The current account balance turned slightly negative in 2018 and is estimated to remain in that area in 2019 and 2020. Trade in services continues to post a surplus, supported by transportation services abroad, and balanced trade in goods is still growing despite the global slowdown. Balances of primary and secondary income remain negative. The negative balance on primary income resulted mostly from negative balances on investment income and secondary income resulted from the negative balance on general government sector.

The governing party extends its lead

The ruling right-wing party Law and Justice (PiS) party has narrowly won a second term in office in the latest parliamentary elections held in October 2019. However, its grip on power was weakened after it lost control of the upper house (Senate) and failed to increase its absolute majority in the more powerful lower chamber (Sejm). The Senate is less powerful than the Sejm. It can delay and amend legislation, but the Sejm can override such moves with an absolute majority that the PiS has. However, the senate also has a say in nominating many key officials, which could undermine PiS’s attempts to put all government institutions under its control. Compared to the previous term, an opposition-controlled upper house is likely to make the legislation process more difficult in this term. That would be specifically the case if the current President Andrzej Duda originating from PiS loses in the presidential elections scheduled for spring this year.

Source:

Coface (02/2020)
Poland