“Without continual growth and progress, such words as improvement, achievement, and success have no meaning.” The words of Benjamin Franklin. And since governments are ever keen to boast of continual growth and progress, one might ask how much economic progress there is in Poland against the backdrop of concerns in some quarters about the rule of law.
One sign of progress is that index compiler FTSE Russell has upgraded Poland’s status from an emerging market to a developed market. This decision means that Poland “has joined the 25 most developed economies of the world,” including Germany, France, Japan, Australia and the United States, according to the Warsaw Stock Exchange in a press release issued on Saturday. It added that Poland is the first Central and Eastern European economy to have been upgraded by FTSE Russell to developed market status. This upgrade “represents an acknowledgement of the progress of the Polish economy” and of the country’s capital market, the WSE’s chief executive officer, Marek Dietl, was quoted as saying.
Like many things in life, this upgrade does have the potential to be a mixed blessing. As Bloomberg reports, while generally positive, one negative effect could arise from developing-market funds being obliged to sell more than PLN 1 billion worth of shares. The real impact is uncertain and will take time to become apparent as the market opens to new types of funds. For his part, Dietl believes that “the dynamic development of the Polish economy represents an opportunity for international investors”, and “Poland’s upgrade to developed market status is a challenge, which we are ready to face.”
Whether there will be enough developed-market funds to replace those tracking Warsaw-listed stocks as an emerging-market asset is not clear. While the upgrade potentially offers exposure to a larger pool of investors which could help Polish companies already expanding in western markets, allowing them to gain recognition among a new group of investors and help them to fund growth, other companies may find the going tougher, especially if they are too small to attract the interest of those funds focussing on developed markets.
Be that as it may, it is perhaps ironic that the upgrade, reflecting the maturity of the market, comes at a time when the Polish government is challenging the western democratic values it adopted following the collapse of communism, when the European Union threatens sanctions against Poland for eroding of the rule of law, and the US government this week called on the government to respect judicial independence by ensuring that any changes are in accordance with Poland’s constitution.
And what of the impact of political risk? Paul P Psaila, New York- based managing director at Morgan Stanley Investment Management said in an interview shortly before the he upgrade that “Polish political risk is a more important topic for foreign direct investment types than it is for equity funds right now.” “Robust growth and the availability of companies that are becoming leaders for the whole region are things that investors cannot reject, especially as politics is a problem in many other emerging countries, not to mention developed ones.”
Moving away from the stock market, the investment position appears rosy with finance minister Mateusz Morawiecki announcing that investment grew by between 4 and 5 per cent in the third quarter of this year up from 0.8 per cent in the second quarter. He is predicting investment growth of between 8 and 9 per cent in the fourth quarter. Next year investment is expected to grow at a similar rate as in 2017 or “even faster,” Morawiecki told reporters on Thursday. He also said that the country’s GDP growth this year was well on track to exceed the government’s projection of 3.6 percent. Last month ratings agency Moody’s upgrade its GDP growth forecast for Poland to 4.3 per cent from an earlier projection of 3.2 per cent
Which no doubt explains why the government remains well ahead in the opinion polls. Its policies – especially the child benefit programme – and the more than doubling of the tax free threshold for income tax have had a positive benefit and have been enormously popular. Furthermore, the suggestion that the government’s campaign promises would be unaffordable have not been borne out so far, with growth up and unemployment down. There are some clouds on the horizon, and the decision to lower the retirement age will be a drain on public finances, but an apparently disorganised opposition seems unable to offer a credible alternative. Which is not to endorse the “prosperity before freedom” approach as the right path for Poland, so much as to show that it has been an effective strategy for PiS thus far, enabling the party to point to its success in delivering improvement to many.