Hitting the ground running: The first 100 days
Hitting the ground running: The first 100 days

The Polish Paradox: how investors can navigate Poland’s new normal

Words by:
January 21, 2019

Poland has long been viewed as one of the most attractive countries in Europe for foreign investment. A highly skilled workforce, comparatively low labour costs and enviable geographic links to major European countries contribute to Poland’s ranking as the second largest Foreign Direct Investment (FDI) destination by jobs created in Europe, ahead of major economies like Germany.

Opportunities for investors look set to increase over the next decade, with a generation of pioneering Polish businesses established after the fall of communism now seeking new ownership as their founders retire. While this potentially creates an attractive investment landscape, business opportunities are complicated by Poland’s ruling Law and Justice (PiS) party, which has struggled to balance the Polish reliance on FDI with the nationalist policies preferred by it’s traditional supporters. This is a factor that potential investors will have to seriously consider before entering the market.

One of the major attractions the Polish market holds is its enviable economic stability. Following the 2008 financial crisis, Poland was the only country within the Eurozone to avoid a recession, a fact the Polish government has been keen to publicise. In the thirty years since the end of communism in Poland, the economy has been boosted by pioneering entrepreneurs taking advantage of Poland’s newly open markets. As the generation approaches retirement, Poland’s Ministry of Enterprise and Technology estimates that one million family run businesses will have to consider succession issues in the next ten years. Many of these businesses are likely to move outside of family control, with the Poznań based Family Business Institute finding that just eight per cent of Polish business heirs want to take over the family business.

These dynamics offer a major opportunity for foreign investors, but only if they can successfully navigate the policies and approach of the nationalist PiS government, and the complex and often contradictory attitude it holds towards foreign investment. A recurring theme in PiS’s economic policy has been its willingness to renationalise or buy significant stakes in companies in strategic sectors that are bought by foreign investors. This has been particularly prevalent in the finance sector. Following the renationalisation of some previously foreign owned banks, the Polish government now owns 40 per cent of all banking assets in Poland. Nationalist and protectionist economic policies such as these are hugely popular with the working class, rural voters who make up PiS’s electoral base.

Despite the trend toward renationalisation, there is acknowledgement within PiS, and particularly by the current Prime Minister Mateusz Morawiecki, that FDI is crucial for maintaining the party’s popularity. New generous welfare policies, such as the reversal of a planned rise in the pension age and new child benefit payments, mean FDI is needed to ensure the country’s deficit does not grow above the EU limit of three per cent, or the Polish constitutional limit of a debt to GDP ratio of 60 per cent. PiS, therefore, walks a tightrope between maintaining credibility with its nationalist base and avoiding an exodus of foreign investors from the country.

PiS has a famously difficult relationship with the EU, which dominates the image of the party abroad. Attempts to reform the judiciary in Poland, including forcibly retiring existing senior judges and giving the government greater powers to appoint replacements of it’s own choosing, resulted in a protracted battle with the EU. In December 2018, PiS announced that the changes would be reversed, effectively ending the long running dispute. However, PiS remains Eurosceptic and prone to courting confrontation with the EU, a policy that may have more serious consequences for investors now that the European Parliament has approved measures to freeze EU funding for members who “undermine democratic values”. The proposals will now move to the European Council, consisting of the leaders of all EU member states. The measures are likely to be a source of confrontation as the Council negotiates the budget, with the most confrontational EU member states – Poland and Hungary – currently being net recipients of EU money.

It’s an election year in Poland, with voters deciding on the new government no later than 1 November 2019. Polish politics is deeply divided between the beneficiaries of PiS’s populist social policies (typically more rural, working class voters), and supporters of the more socially liberal, pro-business Civil Platform. Despite this, PiS has a nine point lead in the polls, and has consistently maintained a lead since winning the last election, held on 25 October 2015, making a change of government this year unlikely. With PiS firmly in control of Polish politics, investors will have to learn to navigate the risks posed by the government in order to reap the potentially significant rewards of the Polish economy.




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