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The Warsaw Voice » Business » November 30, 2010
Business & Economy
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Polish Economy in 2010: Another Good Year
November 30, 2010   
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Poland is retaining its niche this year as one of the fastest-growing European economies.

In 2009, Poland was the only European Union country to have avoided recession, posting GDP growth of 1.7 percent. This year, the economy has been growing twice as fast, but Poland will probably lose its leading position in Europe. The International Monetary Fund has estimated that Poland’s GDP will grow this year by 3.4 percent while Slovakia’s GDP will rise by 4.1 percent.

In the second quarter of 2010, the Polish economy grew by 3.5 percent year on year, according to the Central Statistical Office (GUS). The Economy Ministry projects that the economy grew at the same pace in the third quarter. The ministry expects that the growth rate for the full year to reach 3.6 percent. Poland’s central bank, the National Bank of Poland (NBP), had similar predictions. “This year, the Polish economy should grow by around 3.5 percent,” said NBP President Marek Belka. “We will see a lasting economic revival when businesses become more eager to invest.”

The main driving force behind the economy in the second quarter of 2010 was domestic demand, which increased by 3.9 percent. The Economy Ministry expects that economic growth will continue to stimulate activity in the industrial and construction sectors. It is also projected that the upward trend in industrial output will persist and that output growth will be in double-digit figures.

Industrial sales were higher by 11.8 percent in September 2010 than a year earlier, with increases in output recorded in 28 out of 34 sectors. Manufacturers of computers, electronics and optical products recorded the highest rise in production, more than 40 percent. A high increase, 16 percent, was also recorded in the sector of motor vehicles, trailers and semi-trailers. These figures indicate that favorable trends continued in the sectors that export most of their output. In September 2010, the value of Polish merchandise exports was by almost 17.9 percent higher than a year earlier while the value of imports was up by 24 percent, according to preliminary balance-of-payments data released by the NBP. The data shows that the Polish economy is growing faster than the economies of other EU countries except Slovakia.

In November, the European Commission revised upwards its GDP growth projection for Poland for 2010 to 3.4 percent from the 2.7 percent projected in May. Olli Rehn, European Commissioner for Economic and Monetary Affairs, says the EU, in particular countries in Central and Eastern Europe, may benefit from an improvement in economic conditions in Germany, the EU’s largest economy. The European Commission revised its projection for Poland due to stronger-than-expected data in the first half of the year. The Commission’s view is that the Polish economy is driven by manufacturing and exports, which have returned to pre-crisis levels thanks to a global revival. Household spending increased slightly boosting internal demand, which, according to the Commission, is a sign of higher confidence in the economy.

Public debt problem
Despite its relatively fast economic growth, and strong manufacturing and exports data, Poland faces serious problems which, if left unsolved, may pose a threat to economic stability. One issue is the state of public finances. Poland’s public debt is now close to the cautionary threshold of 55 percent of GDP. If the debt exceeded this threshold, the government would be forced to make drastic cuts in spending.

“Poland is one of the fastest-growing countries in the region, but the mounting public debt burden and an unfavorable course of developments in the euro-zone pose an increasingly evident risk to it,” said the latest Transition Report of the European Bank for Reconstruction and Development.

Leszek Balcerowicz, former deputy prime minister, finance minister and ex-president of the central bank, also thinks that Poland’s public debt is too big in relation to GDP. “In the region, only Hungary comes out poorer,” says Balcerowicz. “Budget expenditure, especially welfare spending, in relation to GDP is also too high. We stand out unfavorably against other countries also in this respect. Large and growing budget spending hampers economic growth and means that our taxes are too high. All countries called economic tigers have had much lower ratio of budget spending to GDP. This is why the greatest barrier to our country’s rapid economic growth is the state of public finances. Those who ignore this problem ignore the Polish reason of state.”

Road-building program gathers momentum
The state of public finances is not the only problem of Poland. One of the major barriers to the country’s economic growth is the poorly developed transport infrastructure, especially roads. For many years much was said about the need to build roads and freeways but little was done. Progress has been made in this area only in recent years. Among the factors that have contributed to this progress is the choice of Poland as one of the hosts of the UEFA Euro 2012 soccer tournament.

Although it will be difficult to carry out all road-building plans, the scale of projects underway has never been as large as it is now. Around 1,400 kilometers of national roads are now being built or modernized, according to data published by the Infrastructure Ministry. Work is underway on the construction of 735 km of freeways, 510 km of expressways and 87 km of beltways. Additionally, 68 kilometers of existing roads are being modernized.

Forty-two contracts for new projects have been signed this year. Contractors have been selected for several freeway and expressway stretches. The total value of these projects is zl.21 billion. In all, from November 2007 to November 2010, contracts were signed for the construction of 1,737 kilometers of national roads, including 743 kilometers of freeways and 993 kilometers of expressways, beltways and large modernization projects.

Despite acceleration in the pace of road-building work, builders will not be able to fulfill their promises for this year. By the end of the year, they will complete only half of the planned 48 kilometers of new freeways. But it should get better in the coming years.

The amount of freeways opened to traffic will increase significantly as of 2011, judging from the scale of projects already started. More than 800 kilometers of freeways and 700 kilometers of expressways will be under construction at the end of this year. In contrast, only 200 kilometers of freeways and 280 kilometers of expressways were under construction in 2007.

But the largest amount of freeways will be completed in 2012. The whole A2 freeway from Warsaw to the border with Germany is to be opened to traffic in that year as is the northern section of the A1 freeway from Gdańsk to Stryków near ŁódĽ, where the A1 will cross with the A2. Road-builders promise that in 2012 drivers will be able to use all of the freeway stretches planned for completion. The target is very ambitious because as many as 565 kilometers of freeways are scheduled for completion in 2012. And more than 330 kilometers are to be completed the previous year.

Funding from EU sources plays a very important role in financing infrastructure projects. Poland, which is the largest beneficiary of EU funds, has already absorbed half of the 67.3 billion euros allocated to the country for the years 2007-2013. Data from the Regional Development Ministry show that 148,200 applications for funding worth zl.347.5 billion were submitted by October this year. More than 42,000 funding agreements worth zl.189.5 billion were signed in the same period. Of this amount, EU funding is worth zl.132.5 billion, or 50.6 percent of the money allocated to Poland for 2007-2013. These favorable results are also reflected in European Commission statistics, which show that Poland is the country which absorbs EU funding most efficiently.

Foreign investors choose Poland
Paradoxically, Poland’s image has improved as a result of the global financial crisis, mainly because Poland is one of the few developed countries to have avoided recession. Consequently, financial markets started to perceive Poland as a large European country with an expanding economy rather than merely a part of the Central and Eastern European region.

The improvement in Poland’s image has been coupled with increased interest in Poland from foreign investors. International corporations are choosing Poland as a location for their new investment projects in Europe not only because of the country’s large market and relatively low labor costs, as they did in the past, but because of its well-educated labor force able to carry out the most technologically advanced projects.

The increased interest from foreign investors—along with GDP growth and the fast rise in industrial output—demonstrates that the condition of the Polish economy is good. The total value of new foreign direct investment in the first half of 2010 exceeded 5 billion euros and was 75 percent higher than a year earlier, according to NBP data. In the first half of 2010, the Polish Information and Foreign Investment Agency (PAIiIZ) successfully completed negotiations with foreign investors on 29 new investment projects. This number is three times higher than in the first half of last year. A reason for optimism is not only a rise in the number and value of new investment projects, but also a change in their structure. There is a marked drop in the share of manufacturing projects, although they still dominate, and a rise in the share of highly specialized services and research and development services, especially in telecommunications, information technology, and the machine-building and aviation industries. One-fourth of the foreign investment projects handled by PAIiIZ are described as intellectual businesses, which require high qualifications.

Poland’s growing attractiveness is reflected not only in statistical data but also in increasingly favorable views of the country on the part of international institutions. The latest research by the management consulting firm AT Kearney, called the 2010 AT Kearney Foreign Direct Investment Confidence Index, shows that Poland is perceived as one of the best investment locations. It ranks sixth in AT Kearney’s global league table in terms of investment attractiveness. China, the United States, India, Brazil and Germany are the only countries with a higher ranking. Since 2007, when the previous report was published, Poland has moved up 16 places, which represents the best improvement in the group of 25 most attractive countries.

A year of big privatization projects
The year 2010 marked the time for big privatization projects in Poland. Some of Europe’s largest initial public offerings were carried out in the country, including the IPOs of such important state-owned companies as the PZU insurance group, the Tauron energy group and the Warsaw Stock Exchange (WSE). Another two large energy groups, Energa and Enea, may be privatized through IPOs by the end of the year. Additionally, many small firms are sold through public auctions and tenders.

Under the government’s financial plan, around zl.55 billion is to be contributed to the state coffers from the sale of stakes in companies over the three years from 2010 to 2013. This year, receipts from privatization are supposed to reach zl.25 billion and there are indications this target will be achieved.

Thanks to the large privatization projects carried out through IPOs, in the second quarter of 2010 the Warsaw exchange ranked second in Europe after London in terms of the number of IPOs and total IPO value. There were 25 IPOs on the Warsaw floor worth 3.15 billion euros. The high IPO value in the second quarter was due to the floatation of two large companies controlled by the state—the PZU insurance group and the Tauron energy group. Their IPOs, with a combined value of almost 3.02 billion euros, were respectively the largest and fourth-largest offerings in Europe in that period. The IPO of PZU, Poland’s largest insurance group, was worth 1.99 billion euros and was the largest offering in WSE’s history after the IPO of the PKO BP bank carried out in the fourth quarter of 2004, which was worth almost 1.78 billion euros. And Tauron’s IPO was worth almost 1.03 billion euros.

The large number of attractive IPOs combined with improved sentiment on global markets pushed stock market indices up. From January to mid-November, the WIG broad-market index gained nearly 16 percent and the WIG20 blue-chip index almost 13 percent.
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