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Poland’s Nationalism is Stifling Economic Growth

Poland’s Law and Justice (PiS) party has been a cause of concern in the Eurozone, ever since winning the country’s parliamentary elections on October 25, 2015. The traditionally socially conservative and Euroskeptic party has pursued several controversial legislative changes that have clashed with Eurozone policy. Mainly, the party looks to consolidate power around the country’s security services, state media and judiciary branch. The European commission has condemned the new government over these changes and earlier this summer “adopted an Opinion concerning the rule of law in Poland.” But it is not only the political sphere that has responded to Poland’s current positioning. The capital markets are also at risk, as investors grow wary of the changing business climate. Slowing foreign investment and a weakening manufacturing sector could lead to a bad spell for the only European country not to fall into a recession during the 2008-2009 financial crisis.

Mateusz Morawiecki was named the Minister of Development of the PiS administration on November 16, 2015. Since then he has presented a new rhetoric for the Polish economy. In an interview titled, Farewell to Neoliberalism in the Rzeczpospolita newspaper, Morawiecki stated, “The economic policy should primarily serve citizens, employees, entrepreneurs and Polish families, and not statistics, numbers and percentages.” He has followed this statement with action, pushing through the controversial new Banking Tax Act in March, which imposes increased taxes on domestic and foreign bank assets. Morawiecki is also looking to pass a bill that would impose new taxes on the country’s supermarkets, an industry controlled by mostly foreign investors. These laws follow similar legislation passed in July 2015 that allows the Ministry of State Treasury “to block investors from buying major stakes in companies regarded as important for national security.” Foreign capital and investment is under attack by this new administration. Investors that have relied on Poland as a strong and growing Eastern European market now harbor many doubts about the future for capital enterprise there. Global investors look for an even playing field when deploying capital overseas. When domestic capital is heavily favored and when foreign investment is dismayed, as evident in Morawiecki’s policy changes, the capital markets react negatively. More specifically, industries that rely on this capital like the financial services, manufacturing and consumer sectors suffer.

Poland’s economy has begun to see the effects of these policy changes as the foreign capital that has been integral to economic growth recedes and the market weakens. Several financial metrics and economic indicators have begun to confirm this trend. The credit agencies Standard and Poor’s (“S&P”) and Moody’s have both responded to the controversial new reform agenda. S&P revised its Poland credit rating to BBB+ from A- on January 15, 2016 and included a negative outlook, meaning that if the rating is not stable it is likely to be lowered. Moody’s maintained its A2 rating but also changed its outlook to negative. Both ratings designate investment grade or higher quality credit worthiness of the country’s government debt but any reduction in rating or outlook is picked up by investors as a warning sign and priced into the consideration of future investment.

Poland’s Purchasing Managers’ Index or PMI is a leading indicator measuring the performance of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. A PMI of more than 50 represents expansion of the manufacturing sector, compared to the previous month. A reading under 50 represents a contraction while a reading at 50 indicates no change. Poland’s PMI had maintained fairly consistent and high levels through the first half of 2015. However, later in the year the PMI started to trail off. The metric has held above 50 but moved much closer to the no-growth level indicating the manufacturing sector, which contributes a great deal to Poland’s GDP, is still increasing but at a slowing rate. Other Eurozone members’ PMI metrics follow a different trend signifying that the change in Poland’s PMI levels is not due to continent-wide systemic factors. Considering the trend in PMI with the country’s export levels, which have been mixed since late 2015, would indicate that capital flows into the country have decreased causing a fall in production and varied levels of exports.

Poland Manufacturing PMI (Source: Trading Economics)

Another indicator of economic performance, the inflation rate of Poland, displays a troubling trend. While the country spent all of 2015 in a disinflationary pricing environment, meaning consumer prices were generally falling on a year-on-year basis, the inflation rate had been trending towards positive territory by the end of the year. However, in January 2016, as the PiS administration began to implement its market constraining policies, the inflation rate trended further negative. Inflation is driven by a surplus of capital. More capital drives down the value of currency and pushes up consumer prices. However, a falling inflation rate, as in the case of the Polish economy, could be attributed to slowing foreign capital flows. This is further evident by examining the M1 money supply as reported by the National Bank of Poland, which shows that an increasing amount of capital creation by the central bank has not been able to stem the falling prices of consumer goods.

Poland's Inflation Rate (Source: Trading Economics)

Poland’s Inflation Rate (Source: Trading Economics)

A stable economic and regulatory environment is vital for attracting foreign direct investment, of which Poland’s domestic economy relies greatly. As Minister of Development Mateusz Morawiecki continues to push an agenda that weakens and reverses the strong relationship between Poland and its global investors, the flows of foreign capital will diminish. While no real-time foreign direct investment metrics are available, they are typically reported on a year to two-year lag, analyzing other economic indicators and metrics seem to prove that the markets are responding to the new administration and have begun exhibiting some hesitation around Poland’s future economic prospects. Foreign direct investment has been a major growth driver for Poland since it abandoned communism in 1989 and joined the EU in 2004. For it to stall or fall would prove dire for all those invested in Poland’s future, from the local level to the global level.

Image: Poland’s Ministry of Finance (credit: Adam-dalekie-pole/Wikimedia Commons)



Michael LoGalbo

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