All change in Poland

Having recently visited Warsaw to get a first-hand sense of the country, gauge the investment opportunity, and meet several influential people from Poland’s chief economist to members of the US embassy here is what was observed.

Politics

Polish Prime Minister Donald Tusk took power in 2023, forming a coalition government. Since then, he’s fulfilled his election promise to unlock European Union (EU) funding through the €34.5 billion Recovery and Resilience Facility. Of this amount, nearly half (47%) is allocated to renewable energy initiatives, and 21% will support the digital transition - including improving access to high-speed internet. While details on the rest of the spending are scant, we expect additional investment in infrastructure, healthcare, and education programmes.

That’s where much of the cooperation with the EU ends. Tusk opposed the EU Green Deal, which included liberalising trade with Ukraine and an immigration quota system. This, though, reflects domestic politics rather than ideology. The country will hold its presidential election in 2025. For his candidate to win, Tusk must court supporters of the PiS, the right-wing party that previously held power.

Ukraine

Ukraine was a central topic at most of our meetings. Military support for the nation remains unequivocal. While criticism is levelled at PiS on many issues, , its backing of Ukraine was consistent and significant. The same can be said for Tusk’s coalition government, which recently announced a security deal with Ukraine. In 2023, defence spending rose to 3% of gross domestic product (GDP), with plans to raise it to 4.5% in 2024 – well above NATO’s 2% requirement.

Opinion is more divided on integration. Poland has welcomed nearly one million Ukrainians. Some 75% of foreign students attending Polish schools are Ukrainian [1] and welfare payments remain generous at 1000 Polish zlotys (€230) per child per month [2]. However, only 17% of Poles support a long-term settlement plan for Ukrainian refugees (down from 37% one year ago). Meanwhile, 61% of Poles want Ukrainians to return home after the war.

Inflation and monetary policy

There are no real surprises here. The central bank will keep rates on hold until at least the first quarter of 2025. For the time being, headline Consumer Price Index inflation has fallen to the central bank’s target range of 2.5% +/- 1. The unwinding of energy subsidies by the end of December will likely push the headline number towards 5%. The overall tone in our meetings was hawkish. Indeed, Adam Glapiński, the Governor of the National Bank of Poland, said the likelihood of rate cuts in 2024 was “nil."

Fiscal policy

Fiscal consolidation remains elusive. The deficit is forecast to increase from 5.1% of GDP in 2023 to 5.3% in 2024. However, it is then expected to fall to 4.4% in 2026.

Our trip coincided with the launch of the European Commission’s EDP (excessive debt procedure). During our discussions, members of the Ministry of Finance (MoF) seemed relaxed about the level of fiscal tightening needed to reduce the deficit to 3% and to maintain the debt-to-GDP ratio below 60%. To comply, Poland will need approximately 0.5% of fiscal adjustment per annum over the next four years, which is not an unrealistic target. Nonetheless, the debt-to-GDP is set to reach 63% by 2027.

On the revenue side, the MoF forecasts tax revenues will grow by 1.8% of GDP in 2026 and by 1% in 2027. Various measures will support this increase, including the reintroduction of VAT on food (from 0% to 5%).

Expenditure continues to focus on managing energy costs and the removal of fuel subsidies. Households have rebuilt their balance sheets since Covid-19. However, there’s an imbalance in the savings rate, which is positive for the top 40% of households and harmful for the bottom 60%.

Retail money continues to flow into the local bond market. According to the Narodowy Bank Polski (NBP), retail investment funded nearly 10% of local bond issuance, up from 1% in 2022. This trend can partly be explained by supply/demand imbalances in the property sector (construction dropped 4.9% year-on-year in February). As a result, people are putting their savings to work in money markets.

Investment implications

In the hard currency space, Polish Eurobonds offer limited value. The spread difference between Polish bonds and 'A' rated bonds in the Emerging Markets Bond Index is narrow, at five basis points (bps). This is only 6 bps higher than the yield the 'A' rated segment offers. Credit rating agencies believe Poland's economic outlook is stable, despite the fiscal challenges. However, as we highlighted, the country's financial situation should improve gradually over the next 18 to 24 months.

The zloty has become more expensive compared to other currencies. It has appreciated while the Czech koruna and Hungarian forint have weakened – we think the NBP will be the last to cut rates in the Central & Eastern European region. A foreign currency exchange, which could see the country receive €23 billion from the EU (2.7% of GDP), would further push up the zloty’s value.

Final thoughts...

Politics in the country remain noisy – whether due to disagreements with the EU or questions around central bank independence. But Poland’s GDP per capita is forecast to rise above that of the UK by 2030. It’s therefore, hard to argue that the country isn’t on a positive trajectory.

Finally, it would be amiss not to finish with Ukraine. Were military support for Ukraine to cease, the threat and fear of Russian aggression westward and into Poland felt very real when I was in Warsaw. Given Poland’s history with the Soviet Union, this is perhaps not an irrational concern. The war in Ukraine, as a result, will continue to dominate headlines in Poland long after it falls from the top of the news agenda in other parts of the world.