Wednesday, May 2, 2012

EUROPoland : threat or opportunity ?

A few weeks ago, during a high level meeting inside EU circle, I heard so many comments about Poland driven by fears. Part of the participant swere criticizing the growing political power when others were afraid of the economic leverage coming from the consistent growth.

As it turns out, years ago, Poland was linked to the image of suffer, refugees, destruction, communism, slaughter,...today, the country is seen as an actor of the future. Since more than a decade, Poland's borders have been secured. National Politics and economy have shown a degree of strength and bilateral relations with Russia and Germany can be defined as good when you think about the polish history.

Since the collapse of the Soviet Union, Warsaw has build up solid ties with key countries in the region and has decided to become a member of important "club" such as Nato (1999), the European Union (2004) and the Organisation for Economic Co-operation and Development (1996).

On the eve of a big european event in Poland, the Euro 2012 which will gather European national teams, the country shows signs of new-found confidence.



A Political threat for Europe ?


Polish Prime Minister Donald Tusk
During the last 20 years, Poland has had 14 governments and since October 2011, Donald Tusk is the first Polish Prime Minister in history to be democratically re-elected for a consecutive term.

Poland has surged as an important political actor in Europe and even for the Obama administration. Last year, the Obama trip in Europe made stops in Ireland, England, France and Poland; no room available for Brussels !

Polish EU Presidency of the Council (second semester of 2011) marked an historical moment both for Europe and Warsaw. Poland had a pro-European stance and supported a stronger Europe because EU needs political leadership with a democratic mandate, not just in time of crisis but in the future as well. Polish were able to pass into law the so-called 6-pack (financial regulation package). Furthermore, they managed and finalized the accession Treaty with Croatia. However, one of the biggest disappointment was the inability to let Bulgaria and Romania access the Shenghen border-free area. Except some failures, Polish authorities were able to turn their Presidency into success.

At the European Parliament, Polish MEPs are mainly member of the centre-right party (EPP, European people's party) and have the presidency of the Committee for Regional Development (REGI). As it turns out, Poland is the only country from the big EU enlargment (from 15 to 25 members states, 2004) to chair a Committee. Danuta Hübner has kept the chair for the second half of the parliamentary term, which means she's taken seriously ! Other Polish politicians into the European Parliament such as Rafal Trzaskowski could become one of these key political players. As the European Voice wrote (http://www.europeanvoice.com) a few months ago, the curiosity is that nearly eight years after the enlargement of the EU in 2004, the Parliament is still for the most part in the grip of MEPs from western and southern Europe. The next two years just might be the period in which MEPs from central and eastern Europe emerge as the future leaders and power-brokers.

What observers should mainly analyse and continuously check is the bilateral relation between Poland and Germany. A marker of Poland's progress these years can be seen in its relationship with his neightbour. In the late 2006, the bilateral relations sink to a new low when a Treaty meant to settle forever the borders between two countries was call into question. Then Poland reshapes ties with Germany with the current Prime Minister Tusk seeing the bilateral relations as a keystone. Under Tusk term, Warsaw sees that Poland's political and economic interest is tied to an increasingly powerful Germany. As Radek Sikorski, Polish Foreign Minister, said a few months ago: German inaction scarier than Germans in action...Poland should just be very careful with its nuclear plan that could damage the relation with Berlin. Indeed, German officials would prefer a more green energy plan without nuclear energy.

 

Polish economy as a strenght for EU economy ?


Poland is the only EU country not to have been in recession in the past 20 years. As Jan Cienski wrote in the Financial Times, the country has turned its location to its advantage, unleashing wave of entrepreneurship and helping sustain economic growth.


The country avoided to dip into recession with a 1.7% growth in 2009, 3.9% in 2010 and 4.3% in 2011. However, future appears less bright (2012-2013) with a GDP growth outlook below 3%, primarly as a result of weak activity in Europe.  

Credit rating agencies rate Poland with a good note but Warsaw deserves a better one in the near future. As it turns out, Moody's rated A2, S&P and Fitch rate at A- (Italy being just two steps higher). On the CDS market (Credit Default Swap), le Polish debt insurance for 5 years were traded at a 238 basis points compared with Italian 409 basis point (source: CME Group http://www.cmegroup.com/).

Investment spending growth will remain robust because of the private sector support and all the road and rail construction for the Euro 2012 soccer championship.

These positive figures must not overshadow the public debt level at 5.6% of the GDP. Prime Minister Tusk has decided to launch reforms (employers disability contributions raised) and cut spending (tax incentives cut and should normaly introduce a tax on metals extraction) in order to fullfill the EU limit of 3% of GDP by 2013 (paving the way for eventual adoption of the Euro in the near future ?). Furthermore, Poland has a good level of gross debt as percentage of GDP because it reached 62.4% in 2010 when other countries like Italy has a debt level around 118% and Belgium at 96% (source: CNN Business).  

Unemployment 1997-2012  source: OECD

In Poland, even if the country rely on a young and savvy workforce, unemployment rate are up to 13.5% (Ferbuary 2012). In a decade, Poland has seen its 15-24  years unemployment segment drop by more than 20%. Indeed, in 2002, youth unemployment was set at 43.9% and the last figures from 2009 showed that this segment was at 20.7% (source: Business Insider www.businessinsider.com). Since 2010, the trends is going up because, among others, the return of young workforce "at home". The last 2 EU Council worked on growth and not anymore on austerity, focusing its attention mainly on young jobless.

Being outside the Eurozone is also, in a way, an asset for Poland because Central bank in Warsaw can ease the market and lower the cost of polish exports. However, a weaker currency has never produced a strong economy in the long term; Polish authorities should learn form past lessons.

Regarding the bank sector, it has to be permanently screened even if, during the crisis, no signs of credit crunch have appeared. On top of that, national banks are very well capitalized according to Marek Belka, central Bank Governor (his words in last Davos summit).

OECD has stated that further reform are needed to raise growth prospects in Poland (http://www.oecd.org/document/18/0,3746,en_21571361_44315115_50000978_1_1_1_1,00.html) via a growth-friendly fiscal consolidation which is the best way to reduce vulnerabilities across the economy. The OECD recommends also to reduce the skills mismatch in the labour market and an improvement in tertiary education, ease the administrative burdens on businesses and move ahead with the privatisation of the state-owned companies.    

Energy sector as an opportunity ?


source: PMR, Polish Power Sector Construction
While countries around the world  try to diversify they energy supplies, Poland has still an heavy dependance on coal. In other words, more than half of polish electricity is produced by coal energy. This situation won't last long because of the carbon targets and all the EU environmental rules to comply with.

The last energy source figures reveal that coal, oil and gas are the 3 pillars of the energy sector with a new entry for the next decades: nuclear.

Historical source, coal, still accounts for more than 50% of Poland's primary energy supply. The other pillar, oil, supplies for 26% of the country energy but Poland import almost all of its crude oil (94% from Russia). Poland's third largest energy source is natural gas (and shale gas) with 13%.

No matter from where the energy supply is coming, Poland would rather prefer a non-russian supply at all. Because Russia uses the dependency as a political tool, Warsaw has started an energy diversification project with a liquefied natural gas import terminal construction and shale gas development. However, as a Stratfor (www.stratfor.com) document revealed, Russian oil and natural gas imports amount to nearly half of Poland's primary energy supply, and these inputs are set to grow as Polish energy demand increases and Warsaw continues to diversify away from coal for numerous reasons.

Even if Poland has natural gas resources, physical infrastructure for gas and electricity are missing which undermine any dreams to lower the russian influence. This weakness can be seen as an opportunity for energy infrastructure suppliers who could invest massively into a market with a growing domestic demand. For instance, chinese firms (China National Electric Equipment Corporation and Shanghai ElectricGroup) eyes on Poland's energy sector and are eager to invest into the coal industry in order to improve the green energy efficiency.

The next 2 challenges for Poland are liquefied natural gas and nuclear plant:
  • On one hand, even if the natural gas is the smallest pillar of energy source in Poland, liquefied gas could be delivered to the rest of the region. Indeed, unlike oil, natural gas cannot be delivred via tanker if it's not liquefied before. Because there are no terminal in this region to liquefied the gas, Poland has a great opportunity ahead to become one of the main supplier in the Central and Eastern Europe.
  • On the other hand, nuclear energy is another step towards diversification and the country is about to construct its first nuclear power plant. Polska Grupa Energetyczna (PGE) is planning to sollicit tenders for constructing a 300 megawatts nuclear plant. Among others, Areva, Edf and Westinghouse Electricity company are willigness to win the multibillion contract.

Regarding the green energy, wind and biomass are coming to the foreground in Poland in order to meet the EU "green" objectives. In 2010, the European Bank for Reconstruction and Development (EBRD) was particularly active in renewable energy and energy conservation projetcts. For details about the EBRD activities in Poland  : http://www.ebrd.com/downloads/research/factsheets/renewables.pdf)

The European Union also invest massively into Poland via its EU cohesion policy 2007-2013. Nearly 28 Bn EUR have been invested into the programme "Infrastructure and Environment" in Poland. Investments were made for implementing renewable sources of energy like wind and biofuels, biocomponents and also developments of systems of transmission of energy coming from renewable sources. Wind and biogas energy sources were the most funded projects (http://www.usea.org/Publications/Documents/US-Poland_Energy_Roundtable_Presentations/07_Financing_Presentations/Cichowska_-_MoEconomy.pdf).

Last but not least, Poland has launched a vital program called CCS, Carbon Captured and Storage which will be operational by 2015 and is seen as a political comitment from Poland towards EU green energy goals (http://www.ccs-politics.se/poland.html).

A special chapter of the last OECD analysis about Poland highlighted the fact that Poland should adopt more efficient environmental policies to promote green growth and help minimise the abatement costs of reducing greenhouse gas emissions. Imposing an economy-wide single carbon price and maintaining the current uniform support to renewable sources of power are key tio minimising overall abatement costs. Government policies to increase the production of nuclear power and natural gas from shale formations should fully consider environmental costs and risks (http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-surveys-poland-2012_eco_surveys-pol-2012-en).  

 

A weaker Real Estate market ?


Warsaw
Positive and negative signals are coming from  both retail real estate and private housing market segments.

In 2011, Poland was the Europe's second-worst performer for housing market with a 10.5% prices fall. Furthermore, unsold units in the country increased by 11 % in 2011. Are we experiencing a housing market bubble burst in Poland ? Starting from 2004, when Poland joined the European Union, price went up. In Warsaw, the price has surged massively for housing market 23% in 2005, 28% in 2006, 45% in 2007, 13% in 2008 and 11% in 2009. Other cities such as Wroclaw saw even larger house price rises. (source: http://www.residentialadvisors.eu).In other words, does EU "imported" a housing boom and then a bubble burst ? As it turns out, joining the EU prompted foreign investors to buy assets in Poland and make prices surge like a bubble and we have (probably ?) reached an hedge. 

Into the retail market, the situation is completely different with retail sales up by 14.3% in January 2012 according to a CBRE analysis (http://www.cbre.com/EN/Pages/Home.aspx). Although, most stock is in large cities, the retail property market is shifting from big cities towards small and medium-sized urban hubs.
 
Roberto De Primis

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