Economic Country Analysis For Poland Economics Essay

Economic Country Analysis For Poland Economics Essay 1. Introduction: Today with a GDP of 2,7% (2010 figure projected by European Commission) Poland is one of the fastest growing European economies. The country suffered relatively little from the recent financial crisis in the world markets due to a large internal demand for consumer goods from the growing middle class and low level of household debt compared to its western peers. In addition there has been almost no exposure to sub-prime mortgage product, the country did however suffer from lower demand for its export products. (European Commission, 2009) The Polish state went through a major transformation since it abolished communism in 1989. It joined NATO in 1999, and the European Union in May 2004. With a population of 38.1 million it is the 6th most populated country in the EU. Polands capital is Warsaw and it has a population of around 2 million inhabitants. Poland has an area of 312,678 sq km and is geographically located in the heart of Europe between Germany and Russia. Polands strategic geographic position has been a source of conflicts and for many centuries, currently its attracting foreign direct investment as it is the EUs gateway to the east. (GUS, 2010) Despite steady economic development Poland still has a large development gap to close compared with countries such as Germany or Britain. Currently the GNI per capita is $11,880 (World Bank, 2008). It is expected to join the Euro zone in 2012-2014. Countrys main export products are: foodstuffs, machinery, transportation equipment and chemicals. Polands political situation is stable with a liberal pro reforms government in office. One last thing to keep in mind is that the Catholic Church plays an important role and despite the fact that it is formally separated from the state it does have a large impact on the social policy. The aim of this report is to look at Polands economy from a broad international investors perspective and give some recommendations whether it is a good destination for investment. 2. Factual description Political and social situation The political stage in Poland has been shocked by the crash of the government plane in April 2010 where countrys residing president, Lech Kaczynski, and many prominent politicians have died. Despite the tremendous scale of the tragedy the markets have been largely intact indicating investors confidence in the Polish economy. The political system can be described as a mix of parliamentary and presidential with a somewhat dominant position of the legislative branch. President Kaczynskis death forced a new presidential election where Bronislaw Komorowski, previous speaker of the parliament and a prominent politician of Civic-Platform, came out victorious in the second round having defeated ex-Presidents twin brother and leader of the parliamentary opposition Jaroslaw Kaczynski. Mr Komorowski is closely connected with the center Civic Platform-led government which suggests that the Prime Minister, Donald Tusk, will be more capable of introducing new reforms. Because Poland has traditional had a largely fragmented multiparty system, the current government is a coalition between the above mentioned Civic Platform and PSL. The international investors should welcome recent changes in the political environment both the legislative and executive branch of the government are largely open to friendly political and economic relations with both the EU and its biggest neighbour Russia. Poland is the only EU country to start its recovery without having fallen into recession, and we expect a continued gradual strengthening of growth in 2010-2011. (Eastern European outlook, 2009) Economic structure and growth According to the European Commission, in 2010 Poland will be the fastest developing country in the EU. Strong economic performance should continue throughout 2011 when Poland is expected to remain amongst the fastest growing economies in Europe (Business news, 2010). Nowadays polish economy is well diversified. The traditionally dominant agricultural sector currently contributes 5% of GDP while, it is a large beneficent of the CAP policy and requires major improvements in its production efficiency. The industrial sector of the economy makes up 30% of the GDP. The sector is mainly concentrated around food processing industries, the automotive industry (the biggest brands Deawoo and Fiat) and labor-intensive processes such as textiles and clothing industry. Polands highly educated work force and relatively low labor prices have attracted investment from many international companies. Especially German firms with labor-intensive processes have moved to Poland to benefit from lower wages . Increasing wages are expected to incentivize these firms to move on to other low-wage countries. While this may sound like bad news, the good news is that Poland is now seen as a destination for knowledge intensive businesses with higher profit margins. With one of the largest internal markets in the EU, Poland is a heavyweight both within the region and the Community. Poland has a relatively closed economy, with a relatively well balanced import and export structure slight dominance of imports. Polands GDP growth is expected to reach 2.7% in 2010 and 3.3% in 2011. (such prognoses for Polands economy were presented on May 5th, 2010 by the European Commission) In 2008 unemployment fell to 9.8% (a historic low), but climbed back to 11% in 2009, and remains above the EU average. Inflation for 2008 reached 4.3%, more than the upper limit of the National Bank of Polands target range (3%), but fell to 3.4% in 2009 due to global economic slowdown. If Poland wants to sustain its rapid economic development and attract both development of regional business and foreign investment it needs to address several issues: simplify laws and lower the time required to form new businesses, streamline its rigid labour code, improve the efficiency of its commercial court system. Furthermore, the state has to address the issues of growing spending on the health care and pension systems. These areas cripple the budget and Poland has a budget deficit little beyond 3% of GDP. One of the reasons the state faces these issues is negative population growth and aging society a problem Europe is largely familiar with. (Theodora, 2010) Country Forecast Overview (3 Year) Key Indicators 2009 2010 2011 Real GDP Growth (%) 1.70 3.10 3.40 Consumer Price Inflation (av;%) 3.45 2.50 2.30 Budget Balance (% of GDP) -1.77 -3.00 -2.80 Current-Account Balance (% of GDP) -1.67 -3.00 -3.40 Exchange Rate US$:Euro (av) 3.12 3.12 3.14 Exchange Rate US$:Euro(year-end) 2.85 3.13 3.10 Source: Country Forecast Poland May 2010 Country Forecast Overview (3 Year) Key Indicators 2009 2010 2011 Real GDP Growth (%) 1.70 3.10 3.40 Consumer Price Inflation (av;%) 3.45 2.50 2.30 Budget Balance (% of GDP) -1.77 -3.00 -2.80 Current-Account Balance (% of GDP) -1.67 -3.00 -3.40 Exchange Rate US$:Euro (av) 3.12 3.12 3.14 Exchange Rate US$:Euro(year-end) 2.85 3.13 3.10 Source: Country Forecast Poland May 2010 Year GDP in Billions of USD PPP % GDP Growth 2005 518.00 3.65 2006 567.48 6.27 2007 623.43 6.86 2008 668.58 5.00 2009 688.69 1.70 Source: EIU Country Data 2009 2008 GDP (purchasing power parity) $686.2 billion $678.8 billion GDP per capita (PPP): $17,800 $17,600 Labor force: 16.99 million Unemployment rate: 11% 9.8% Investment (gross fixed): 20.7% of GDP Public debt: 47.5% of GDP 45.2% of GDP Inflation rate (consumer prices): 3.4% 4.2% GDP composition by sector (2009): agriculture: 4.6% industry: 28.1% services: 67.3% Labor force by occupation (2005): agriculture: 17.4% industry: 29.2% services: 53.4% Export / import structure Polands geographical position between the developed Western states and the emerging markets of Eastern Europe (Russia, Ukraine and perhaps Belorussia in the future) makes it a strategic location for exporting industries trying to access high demand consumer markets (Lopez, 2009). Polish main agricultural products are: potatoes, fruits, vegetables, wheat; poultry, eggs, pork. Major industrial sectors are: machine building, iron and steel, coal mining, chemicals, shipbuilding, food processing, glass blowing, beverages, textiles. Polands exports in 2009 (est.) equaled $134.7 billion down from $178.4 billion in 2008. The export structure by products is as follows: machinery and transport equipment 37.8%, intermediate manufactured goods 23.7%, miscellaneous manufactured goods 17.1%, food and live animals 7.6%. The export structure by destination is: Germany 24.9%, France 6.2%, Italy 6%, UK 5.7%, Czech Republic 5.6%, Russia 5.3% (2008) Polands imports in 2009 reached $141.7 billion (est.), significantly below the $204.4 billion for 2008. The imports structure by products is as follows: machinery and transport equipment 38%, intermediate manufactured goods 21%, chemicals 14.8%, minerals, fuels, lubricants, and related materials 9.1%. The imports structure by trading partner is: Germany 28.3%, Russia 9.9%, Italy 6.2%, Netherlands 5.4%, France 4.8%, China 4.5%, Czech Republic 4% (2008) (Source: CIA WorldFactbook, 2010 ) Budget (2009): revenues: $83.68 billion expenditures: $93.47 billion Fiscal policy The direction of fiscal and monetary policies is largely influenced by the European Union and Polands ambition to join the Euro-zone. Adopting of the single currency requires the state to reform the public finance and curb the inflation and budget deficit in line with guidelines of the ERM II. The government had a deadline in mind to join the Euro-zone in 2012 however due to the global financial crisis it has been rumored that the date may be pushed back to 2013-2014. Before this happens Polands constitution needs to be amended and the budget balance has to be brought back to 3% of GDP. (Europa Press releases, 2009) Fight with the fiscal deficit is made difficult by the fact that currently around 66% of the spending is fixed with major portion of the funding going to social security/pension schemes and wages in the public sector. Over the next two years the fiscal deficit is projected to oscillate around 3-4%. On the positive side the government has proposed a tightening of its budget in July 2010 and hopes to benefit from the expected rise in the economic cycle. What may worry potential investors is that the upcoming parliamentary elections will incentivize the government to postpone and budget cuts until it secures a second turn. Another issue is the public debt level. This is especially a hot topic due to the situation in Greece. Polands public debt level has stabilized over past 5 years due to strong economic growth, in 2008 it has slightly exceeded 45% of the GDP and by the end of 2010 should be just below 50% of GDP. While this is still an acceptable level as Maastricht treaty has set the limit at 60%, it should be kept in mind that going beyond 50,55,60% will trigger more strict targets for fiscal restraint. (The Market Oracle, 2009) Monetary policy The main goal behind the monetary policy in Poland is to contain the inflation within the 2.5% +/- 1% target band. The National Bank of Poland has lowered the policy rate from a high of 6% in October 2008 to 3.5% in June 2009 in an attempt to stimulate the economy (Reintje Maasdam, 2009). The gradual appreciation of the Zloty (since March 2010) aids monetary loosening. However, as inflation remains stubbornly high, the NBP is reluctant to cut rates further. Moreover, if the interest-rate differential with the euro zone and Switzerland is narrowed too much, this could push the zloty down again. 2009 and in 2010, the slowing economy will curb wage growth with a disinflationary effect, while the strengthening zloty will also help to keep inflation in check. Inflation is expected to be around 2.5% in 2010. The zloty responded strongly to the risk aversion to Eastern Europe. 3. Analysis of factors influencing the business environment Thanks to largely limited exposure to subprime mortgages, consistent fiscal and monetary policy, large internal market and low level of household debt, Poland was more immune to the turbulence on the world markets than other members of the European Community. Poland was the only state in the EU in 2009 to report a positive economic growth of 1,8% GDP. source: Data from Central Statistical Office  as of  31.05.2010  and Eurostat as of 12.05.2010.   Poland currently is the main recipient of EU cohesion funds, with EU transfers set to reach an annual average of 3.3% of GDP in the coming years (Katarzyna Szulc, 2008). This should allow for major investment in infrastructure including railway, highways and new airports, which will in turn help attract large inward FDI flow. This is all good news for the investors, especially if we keep in mind that there are major investments made due to the preparations for 2012 Euro Cup. Postponing of the adoption of the euro has been seen as a major issue until recently, but now with the events in Greece many people find the polish zloty comforting. Poland has a generally well educated population which allows it to be competitive in more knowledge intensive industries but needs to improve the ease of doing business. It is currently constrained by large bureaucracy and outdated laws governing new business formulation and taxation. Perhaps the legislators need not look as far as Singapore for success stories and benchmarks for best practices but can turn to their Baltic colleagues. Poland Compared to global good practice economy as well as selected economies: Source: The International Bank for Reconstruction and Development / The World Bank Washington, D.C.Doing Business 2010, Poland, 2009 Poland has been successively reducing the gap separating it from the 15 old EU countries. In 2000, Polands GDP per capita was USD 4.473 and in 2009 it rose more than four times to reach USD 18.072. Our country has also recorded a stable increase in consumer expenditure at an average annual rate of 5 percent. source: World Economic Outlook Database, October 2009 4. Recommendations and issues for discussion Poland will most likely remain a good destination for investment over the next couple years. While it may perhaps not yield returns as high as less developed countries such as Kazakhstan it is characterized by a much lower risk profile and transparent legal and political systems. Poland is currently a major recipient of EU funding which helps improve the infrastructure and lower the gap between rural and urban areas. Furthermore the Euro 2012 requires an enormous rise of the hospitality and transportation sectors. The even should help promote Poland around the world and lead to an influx of tourists. Poland also benefits from a rising middle class which is a source of high demand for consumer goods. In addition as there will be further growth in the real estate sector as the ratio between the number of dwellings and inhabitants is below EU average. These trends should be strengthened by the planned reductions in the personal income tax.