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The Warsaw Voice » Business » November 25, 2011
Polish Economy in 2011
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Still Growing
November 25, 2011   
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Poland maintained its position as one of the fastest growing economies in the European Union in 2011.

In 2010, Poland’s economy expanded by a healthy 3.8 percent. A similar rate of growth is expected in 2011. Preliminary data released by the government’s Central Statistical Office (GUS) indicates that Poland’s GDP in the second quarter of 2011 was 4.3 percent higher in real terms than in the same period last year.

Poland’s economic growth continues and remains one of the highest in Europe. Domestic demand was the main factor driving the Polish economy in the second quarter of 2011, according to the Economy Ministry. Household consumer spending was on the rise and inventory rebuilding continued. Meanwhile, external demand was no longer the key economic driver.

The Economy Ministry predicts that in 2011 as a whole Poland’s GDP growth will approach 4.2 percent. Further changes in the country’s gross domestic product will largely depend on what happens abroad, the ministry says. According to its analysts, the decisive factor will be a strengthening of positive trends and expectations with regard to the world economy. Economic growth is expected to continue to stimulate industry and construction.

The revival in consumer demand was reflected in a rise in retail sales, which grew 7.4 percent in the first three quarters of 2011. Another positive trend in the Polish economy is a growing propensity to carry out new investment projects. An improved economic performance of the corporate sector combined with easier access to credit have had a positive influence on investment projects.

In the first nine months of 2011, there was a visible recovery in industry, reflected by a 7-percent increase in sales. But particularly impressive was a 18.2-percent rise in construction and assembly output, after a 1.5-percent drop a year earlier.

Exporters have also been doing well in 2011. In the first three quarters of the year, revenue from exports increased by 15.3 percent to 89.3 billion euros, with imports growing by 15.1 percent to 98.4 billion euros.

As economy ministry analysts expected, the prices of consumer goods and services have risen steadily throughout 2011. In September, the consumer price index (CPI) reached 4.2 percent in year-on-year terms, up from 2.6 percent in September 2010. The price increase in 2011 has primarily been due to growing food and energy prices on international markets. According to most forecasts, by the end of the year, the inflation rate should fall slightly, but it is unlikely to return to last year’s level anytime soon.

Unemployment high
Another major problem is unemployment, which is still running high in Poland. At the end of September 2011, the number of unemployed registered with unemployment agencies stood at 1,862,000. This was 6,400 more than in August and roughly 49,000 more than in September 2010.

The registered unemployment rate at the end of September stood at 11.8 percent, up from 11.5 percent in September 2010.

The labor market has been influenced in 2011 by factors including slower business during the global crisis. Despite the economic slowdown in recent years, however, the indicators have not deteriorated markedly. This is chiefly because businesses have adapted their labor costs to lower demand through flexible forms of employment. According to the economy ministry, the labor market should now improve significantly, in terms of both employment growth and a significant reduction in the number of unemployed. At the end of 2011, the unemployment rate is expected to be around 11 percent, the ministry says.

More foreign investmentb
Surveys of investors and the latest data on foreign direct investment (FDI) show that Poland is holding strong as one of the most attractive investment destinations in Europe.

According to the 2011 World Investment Report published by the United Nations Conference on Trade and Development (UNCTAD) in late July, Poland is the world’s sixth most attractive country for investors. Poland climbed to sixth place overall in the UNCTAD report from 11th place last year. China, the United States, India, Brazil and Russia are ahead of Poland in terms of attractiveness to investors, while Germany and Britain, for example, lag behind.

Despite a decline in the FDI inflow to Poland in 2010, upward trends in this area can now be clearly seen. In the first five months of the year, the FDI inflow totaled 4.2 billion euros, or 62 percent of the total figure for 2010.

“Despite the global crisis, Poland continues to attract investment,” said Deputy Prime Minister and Economy Minister Waldemar Pawlak. “In 2011, this may be as much as 11 billion euros.” According to Pawlak, Poland’s success in attracting investors is primarily due to the professional qualifications of Polish workers and political and economic stability. Foreign companies are also drawn by the country’s low labor costs, access to EU markets, a growing number of consumers and investment incentives. One of the key incentives are Poland’s special economic zones, which have created almost 250,000 new jobs and attracted zl.75 billion worth of investment over the past 15 years.

Poland’s growing investment appeal is confirmed by data released by the Polish Information and Foreign Investment Agency (PAIiIZ). The agency says it has had more investment projects in the pipeline this year than last year. The value of projects successfully “closed” by the agency in the first eight months of the year rose by 64 percent, from 585.5 million euros in 2010 to 961.8 million euros in 2011. Also the average value of a single closed project rose substantially, the agency says. It now stands at 27.5 million euros vs. 15.8 million euros in 2010. The number of jobs created by projects supported by PAIiIZ rose by 2 percent, from 8,158 in 2010 to 8,296 in 2011. The growth in the number of jobs may not be particularly impressive, but it has a lot to do with a change in the nature of investment projects located in this country. Today Poland attracts more projects from knowledge-intensive sectors such as business process outsourcing (BPO) and research and development (R&D), where jobs tend to be less numerous but create employment opportunities for highly-qualified specialists.

Business service centers have recently become a Polish specialty as far as FDI is concerned. Data by the Association of Business Service Leaders in Poland (ABSL) shows that in 2010 the value of offshoring investment in Eastern Europe rose 15 percent, and, at an annual growth rate of 20 percent, Poland was the strongest center for offshoring investment in the region. According to ABSL experts, over the next few years Poland may become the largest center for advanced services for global business not only in the region, but across Europe.

Experts note that Poland is still capable of attracting huge investments by large international companies. This is reassuring, they say, particularly in the light of the fact that, according to many experts, Poland does not offer investment incentives as attractive as other emerging markets. Today, global corporations are fighting incessantly for talented individuals and market shares. It is thanks to its skilled work force and market scale that Poland places high in attractiveness rankings.

WSE strengthens its position
The strength of the Polish economy is reflected not only by its upbeat macroeconomic indicators, but also by a developing capital market. Despite discouraging trends abroad, the Warsaw Stock Exchange (WSE) has strengthened its position as the largest and most rapidly growing stock market in this part of Europe in 2011. The WSE has become a major capital market in Europe, taking advantage of the growth potential of the Polish economy and the dynamism of the country’s capital market.

The WSE is an attractive floor for not only Polish companies but also foreign issuers. More than 40 foreign companies are listed on the WSE. Most of them are based in other Central and Eastern European countries, chiefly Ukraine.

In early November, a total of 426 companies, both domestic and foreign, were listed on the WSE’s main market, with a combined capitalization of over zl.680 billion. Another strength of the WSE is the number and value of IPOs. According to an IPO Watch Europe report published by PricewaterhouseCoopers (PwC), the WSE led the field in Europe in terms of the number of IPOs in the first, second and third quarters of 2011 (in terms of the regulated and alternative markets combined).

In the third quarter of this year, 61 new companies were listed on the WSE, seven on the main market and 54 on the NewConnect alternative market. This was the best quarterly result in the history of the Warsaw Stock Exchange, meaning that the WSE accounted for half of the IPOs in Europe in the third quarter. The total value of IPOs carried out in Warsaw was 1.5 billion euros, mainly due to the privatization of Jastrzębska Spółka Węglowa coal company, which was the third largest IPO in Europe.

The group of foreign companies listed in Warsaw expanded to include Coal Energy, a Ukrainian company registered in Luxembourg (the market’s 11th Ukrainian listing to date); Lithuanian company Agrowill (second Lithuanian listing); and Avtech Aviation and Engineering of Britain (seventh foreign company to be listed on NewConnect). This shows that the WSE is successfully pressing ahead with its strategy of becoming an international market and strengthening its position in the world.

In terms of the value of IPOs in the third quarter of 2011, the Warsaw Stock Exchange was in second place in Europe, behind the Spanish BME stock exchange, and—for the first time ever—ahead of the London Stock Exchange and Deutsche Börse, both of which were far more seriously affected by the financial crisis.

“The fact that the Warsaw Stock Exchange has maintained its lead in Europe in terms of the number of IPOs for the third straight quarter is undoubtedly a huge success for the WSE,” said Filip Gorczyca, a capital market expert at PwC. “It seems that Warsaw should find it easy to maintain this position for the whole of 2011. But it must be borne in mind that the number of IPOs on the Warsaw Stock Exchange in the third quarter does not reflect the actual situation on the primary market. The reason is that the offerings on the NewConnect market, which accounted for the vast majority of the IPOs, take place a few weeks or even months before the shares actually hit the market. This delay means that the companies that were listed on the alternative market in the third quarter had managed to raise funds still before the August downturn on the global stock markets. This downturn, along with changing investor moods, led to a situation in which sources of funds have almost completely dried up on the primary market. Consequently, one should expect a decline in the number of IPOs in the fourth quarter, even though this is usually a time when we see the greatest activity on the IPO market.”

Commenting on the prospects for the near future, Jacek Socha, vice-president of PwC in Poland, said, “Due to the latest turmoil on financial markets, most IPOs planned for August and September have been either postponed or canceled. The continuing uncertainty over future developments in the global economy will continue to adversely affect IPO activity in the coming months. Under these unfavorable circumstances, the Warsaw Stock Exchange, however, has a chance to strengthen its position vis-a-vis other European markets, of course provided the Polish economy is still successful in resisting the crisis.”


Opinion
Henning Esskuchen, Co-Head, Equity Research CEE, Erste Group:
Since the beginning of the year the Polish stock market indexes WIG and WIG20 have both lost some 21 percent in euro terms, placing somewhere in the middle of the scores for other regional markets. The world did better for this period, with the MSCI World Index dropping 8 percent, as did emerging markets overall—the MSCI Emerging World Index lost 17.4 percent. While emerging markets are seen as markets that would typically bring more return, the equation of more return for higher risk backfires in times of high risk aversion. In particular Poland has suffered when measured in euro terms, while its performance in domestic currency does not look that bad, at minus 13 percent. However, here we come to the weak point for Poland’s outlook. When fears on sovereign debt swelled high in the third quarter, we not only saw quite a weak market in Poland per se, but the currency nose-dived as well. This volatility (not to say weakness) might continue as long as concerns over Poland’s fiscal deficit—which is among the highest in the region—remain. Otherwise, the Polish economy continues to look quite robust, ready to shoulder whatever might come in terms of further crisis, as it did in the previous downswing.

Healthy GDP Growth to Continue: Reports
Professional services company Ernst & Young and the Oxford Economics research institute have listed Poland in the top 25 Rapid-Growth Markets – countries that are expected to have the greatest impact on the global economy over the next 10 years. The economists predict the Polish economy will grow by 4.1 percent this year, 3.3 percent in 2012, and then accelerate to 4.3 percent in 2013, against 3.8 percent last year. They forecast a 4.1 percent growth rate in 2014 and 3.7 percent in 2015.

“After a slight slowdown in 2012, the growth of the Polish economy should stabilize in the following years at a rate of around 4 percent annually,” said Piotr Ciżkowicz, chief economist at Ernst & Young. “The main risk to economic growth in Poland is the second wave of the crisis in eurozone countries triggered by fiscal problems.” Private domestic consumption should be the main driver of Poland’s GDP growth in coming years, Ciżkowicz said.

In its EMEA Economics – Outlook 2012 commentary published Nov. 15, the Swiss investment bank UBS also predicts that Poland is likely to keep its position of growth leader in Central and Eastern Europe. UBS projects that the Polish economy will grow by 4.0 percent in 2011, 2.9 percent in 2012 and 3.4 percent in 2013. Domestic demand will remain the main driver of economic growth while the biggest challenge in the next two years will be reducing the public finance deficit to 3.0 percent of GDP from around 5.5 percent of GDP in 2011, UBS said.
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