Poland: The Economic Consequences of the PiS

How is Poland doing these days under new management?

Not so well according to Bloomberg:

Polish Stocks Count $50 Billion Cost One Year After Duda Win

Twelve months on from Andrzej Duda’s surprise initial victory in Poland’s presidential elections, stock investors are fleeing the country. And there’s little sign they will come back any time soon.

The benchmark WIG20 Index has suffered the worst losses worldwide this quarter among 93 gauges tracked by Bloomberg in dollar terms, exacerbating a rout that’s wiped $50 billion off Poland’s market capitalization since Duda triumphed in the first round of voting on May 10 last year.

NN Investment Partners and Blackfriars Asset Management Ltd. say the declines will continue unless the Law & Justice government changes course.

“Poland is a clear short,” said Nathan Griffiths, a senior emerging-market equities manager who helps oversee $1.1 billion at NN Investment in The Hague and has held fewer Polish stocks than benchmarks suggest for at least a year. “The reality is that the WIG20 is worth a lot less today than a year ago simply because of the Law & Justice party.”

The slide in stock values is testament to the deterioration of confidence in a market once regarded as a haven among developing economies. The Law & Justice party from which Duda hails took over the government in October, giving it free rein to impose a bank tax that’s set to erode industry profits, while also adopting measures to encroach on institutions like the country’s top court, prompting Poland’s first-ever credit downgrade in January.

Poland’s GDP growth numbers remain among the best in Europe. But is the new Law and Justice (PiS) government merely coasting along on the momentum built up by its predecessor, while steadily storing up trouble for itself?

Jarosław Kaczynski has won power by relentlessly championing the idea of More Poland (and More Poles). He plays skilfully on Poles’ romantic views about themselves but also on a Polish collective pessimism. Poland is not a multi-culti melting-pot with different languages and ethnic traditions jostling for position, as now happens in most western European countries. Instead it is a genuine nation-state, where state institutions are seen as championing the cause of the Polish nation as such. However ridiculous it sounds to say so, Poland is overwhelmingly Polish. PiS wants it to stay that way.

Hence the important More Poland features of the Law and Justice policy platform. Moves to make Polish banks and their accumulated assets less susceptible to machinations and failures by foreign banks. New laws aimed at limiting the right of foreigners to buy Polish farmland. New taxes on large supermarket chains. And above all, a generous but expensive plan to boost child benefit payments to Polish families. These payments of some £90 per month for all second and subsequent children will be a major income boost for poor families, and (it is hoped) help encourage the appearance of more Polish babies – Poland’s demographic profile is sickly. If Law and Justice win the next parliamentary elections too, this policy will be at the heart of their victory.

All of which costs money. Taxing banks may be popular with PiS voters, but it is having consequences elsewhere. Bloomberg again:

Instead of lending into the real economy, banks opted to buy a record amount of government debt, which is exempt from the tax, in the first two months of 2016, Finance Ministry data show.

Industry profits were already reeling from some of the lowest lending rates on record and the added burden is forcing banks to compensate by ring-fencing as much of their balance sheets as possible from the tax. The central bank said on Tuesday that lenders were turning down more loan applications partly in response to the tax, while Oxford Economics predicted credit retrenchment will shave a 0.2 percentage points from 2016 growth.

… The bank tax has drawn comparisons with similar measures implemented in Hungary where Prime Minister Viktor Orban’s government imposed a levy on lenders and made banks bear the costs of converting mortgages denominated in foreign currencies into forint. The policy resulted in bank losses and led to a deterioration in lending capacity before the Hungarian government reduced the tax to 0.24 percent of total assets this year from 0.53 percent in 2015.

This sense of declining international confidence is reinforced by impressive public demonstrations in Poland against PiS’ policies on the Constitutional Tribunal and state media. Poland is polarized! This is prompting some odd anguish among the chatterati:

Law and Justice, led by Jarosław Kaczyński, has justified its battery of political and personnel changes by saying that the party is only undoing what its predecessor, Civil Platform, did during its stint in power from 2007 to 2015. Yet before that, Law and Justice had tried to steer the country in a conservative, Eurosceptic direction during its previous term in office between 2005 and 2007 – a direction that Civic platform reversed.

Hmm. Really? As I remember it, Law and Justice did rather a fine job for central Europe’s integration into the EU mainstream by getting the noisiest former Polish anti-EU populists off the streets and into smart suits and dreary EU meetings, thereby neutralising them as independent political forces once and for all.

My own modest researches suggest that for all the PiS lofty talk of creating a strong, modern state, PiS lack guile and imagination and inclusiveness in doing so. In Deputy Prime Minister Mateusz Morawiecki they have a top-class financial expert with impeccable patriotic credentials. Elsewhere More Poland too easily defaults into appointing Law and Justice loyalists to key jobs, without obvious strategic thinking about what a modern state needs to do to be effective and flexible. Institutions or processes set up by the previous government (such as the new Diplomatic Academy that has been building itself up nicely as a world-class facility) are summarily ‘liquidated’ for no good reasons. Draft laws emerge badly drafted or not fully thought through. Letters from Polish Ministers to top Brussels officials can read poorly or are otherwise unconvincing.

Perhaps most importantly, Law and Justice experts are invisible on the usual circuits quietly exchanging ideas with senior business people and financiers and briefing investors on close government thinking. This makes it very difficult to work out what level of certainty and stability investors can expect. New investment decisions are going on hold for a while, in the hope that as the government gets into its stride things become more predictable.

For now Poland’s economic numbers will continue to be strong as investments made in previous years come on stream. The challenge will come in a couple of years’ time when the full costs of the new Law and Justice social programmes and tax policies start to be borne, and investment hesitation now about Poland’s prospects starts to be felt. When sooner or later that combines with wider European or global uncertainty (migrants, Eurozone, terrorism, Brexit, Trumpism, Ukraine – take your pick) Poland’s economic success could hit serious difficulties.

If they are as smart as they say they are, PiS will start preparing for tougher times ahead by being more measured and less explicitly confrontational. Or will they see a divided inept opposition at home, as well as the whole post-Cold War European project apparently ailing, and conclude that their current truculently introspective approach is just what’s needed to maintain enough support to win the next election too?

One way or the other, the long-term opportunity costs to Poland of missing out on significant new investment because of a stance of contrived political defiance will be colossal (if invisible) well into the future. Less Poland for More Poland!