The Polish ‘Economic Miracle’ Comes With Warnings
(Bloomberg) -- There’s lot of evidence to support the Polish prime minister’s claim that his country is an “economic miracle.”
Growth is humming at more than twice the rate of the euro region, new tax inflows are plugging the budget deficit and, as of Monday, the country is no longer designated as an emerging market for stock investors.
“Developed” status, though, comes with developing challenges, and Poland may be storing up trouble. The nationalist government has fueled growth by lining the pockets of consumers with increased social spending while it’s tightened the state’s grip over business. The country has thrived on being the biggest net recipient of European Union funding, though is threatened with sanctions from Brussels over its power grab of the courts.
Moody’s Corp. said last week that despite the boom, Poland is running one of eastern Europe’s biggest underlying fiscal deficits. Economists surveyed by Bloomberg expect growth to slow to below 3 percent within two years, enviable for most countries, but a significant slowdown for Poland and closer to rates in the Netherlands and Austria.
Temporary factors such as revved up growth in neighboring Germany and the EU’s largess are masking growing weaknesses, according to Leszek Balcerowicz, the author of Poland’s sweeping post-communist market reforms. The governing Law & Justice party’s policies of reducing the retirement age, handouts to families and eroding independent institutions are filtering their way through the economy, he said.
“Unfortunately, we are on the worst possible path in terms of long-term growth prospects,” Balcerowicz, a former central bank chief, finance minister and politician in a now-defunct party, said in an interview at his office at the Warsaw School of Economics.
Gross domestic product expanded 5.1 percent in the second quarter. Growth will slow this year and next before dropping to 2.9 percent in 2020, according to the Bloomberg survey of 26 analyst forecasts.
Moody’s said it expects a shortage of workers already felt by more than half of Polish companies. There are also demographic trends, including an exodus of workers to richer EU nations and one of the lowest birth rates in Europe, that will contribute to the slowdown.
There’s also the potential for lower inflows from the EU budget, which may be reduced further in the post-2020 fiscal plan if the bloc decides to make some funds conditional on whether a member state respects democratic values. Indications that Poland’s justice system isn't free of political bias could change the overall investment sentiment, Moody’s analyst Heiko Peters said on Thursday.
The structural fiscal deficit, which strips out the effects of economic cycles, remains at more than 2 percent of GDP, Moody’s said. That’s the biggest in eastern Europe after Romania and Hungary, both rated four steps below Poland’s A2 grade.
“We just passed the peak of our cycle and we’re facing a slowdown in the EU and globally,” said Piotr Poplawski, a senior economist at ING Bank Slaski SA in Warsaw. He expects Polish growth to slow to 2.7 percent in 2020. “After the boom ends, Poland’s structural deficit problem will also be more clearly seen.”
Prime Minister Mateusz Morawiecki, a former banker picked to run the country by Law & Justice leader Jaroslaw Kaczynski, has been championing the government’s stewardship of the $525 billion economy. The elimination of tax loopholes has created an “economic miracle” by providing 40 billion zloty of new budget revenue for government programs, he said in July.
Now the graduation of Polish stocks to developed status at index provider FTSE Russell is proof that the model is working, he said in a video message to Bloomberg on Tuesday.
For decades “the Polish model was mostly characterized by a policy of economic liberalization, rooted in the Washington consensus,” Morawiecki said. But it didn’t produce an “innovative or socially-inclusive economy,” he said, and Poland needed a “new impulse” to boost competitiveness and “enhance the quality of life of citizens.”
Investors haven’t been impressed by the new approach, though nor have they run for cover.
The Warsaw Stock Exchange’s WIG20 Index has lost 5.5 percent in dollar terms over the past 12 months, compared with a 2.9 percent drop in the MSCI Emerging Market Index. Poland’s local-currency bonds, where foreign investors hold $52 billion, or nearly a third of the outstanding total, returned 3.9 percent in dollar terms. The Bloomberg Barclays Emerging Markets Local Currency Government Index declined 4.8 percent.
The problem is that the government’s budget windfall came mainly from the economic boom and increases in numerous levies and fees, such as a new fuel surcharge, rather than better tax collection, according to research by Balcerowicz’s think-tank, the Civil Development Forum. In fact, it missed the best opportunity in a decade to build up reserves for when growth slows, he said.
Investment remains below rates seen in some of Poland’s neighbors, even though the government has spent EU cash to help catch up with western Europe. Projects range from the construction of new highways to refurbishing sidewalks and local schools. Outlays by private companies, or the “most productive part of investment,” remain hobbled by political risk, said Balcerowicz, 71, who was also a deputy prime minister in Poland’s first post-communist cabinets.
This month, Poland’s government has been sued by the EU for taking over the courts, while its “re-Polonisation” efforts transferred control over of a majority of the nation’s banking assets back to the state.
“Anti-reforms are deepening Poland’s weaknesses while anti-market propaganda poisons people’s minds,” said Balcerowicz, who as National Bank of Poland Governor clashed with Law & Justice during its first term in government last decade. “It’s clear that problems with the rule of law will impact the economy.”
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