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Threats to Poland’s economic growth

Poland’s low domestic savings rate and other capacity constraints threaten to restrict the economy to below-potential growth next year after two years of robust expansion and continued convergence with western EU economies, says Scope Ratings.

Scope expects Poland’s (A+/Stable) growth to slow to 3.5% in 2020, below its potential growth rate of 3.9% and this year’s growth of around 4%, after 5.1% in 2018.

“The expected reversion of Poland’s growth rate to its long-term trend – GDP expanded by 3.5% a year on average between 2009-2018 – reflects the country’s capacity constraints, convergence to living standards of western EU countries, alongside weakening demand from major trading partners, which is only slowly filtering to the Polish economy,” says Jakob Suwalski, analyst at Scope.

Scope affirmed Poland’s long-term foreign- and local-currency issuer ratings at A+, with a Stable Outlook, on 1 November, on the grounds of the country’s strong economic growth, credible monetary and fiscal frameworks, adequate external buffers and sound banking system.

“Poland needs to put further emphasis on attracting foreign investment and improving domestic capital markets,” says Suwalski. “That would compensate for low national savings and help maintain the level of investment required to ensure high growth rates over the longer run while making the most of today’s low interest rates and the country’s sound banking systemю.”

Low national savings and weak business investment are typical of economies in Central and Eastern Europe, but Poland’s savings (at 20.1% of GDP in 2018) have been lower compared with that of its neighbors. This low savings rate mirrors the low investment rate of the Polish non-financial corporate sector, which is dominated by labor-intensive, rather than capital-intensive, small- and medium-sized enterprises.

“This weighs on Poland’s economic potential, which ensures that the real economy is reliant on investment from abroad,” Suwalski says. “Increasingly, the main investment burden is going to fall on foreign companies as EU structural funds that Poland receives shrink in line with the economy’s convergence with the average incomes of western European countries.”

Poland has a good record in attracting foreign direct investment, which is one of the reasons for the economy’s resilience this year in the face of slowing growth among its most important trading partners. Net inflows of foreign direct investment totalled around 2.5% of GDP in 2018, the highest level since 2011, and saw the highest increase year-over-year in the EU after that of Ireland, a testament to investor confidence in Poland’s increasingly competitive business sector.

“Despite low domestic savings, Poland has benefitted from a transfer of external savings and will remain an attractive destination for foreign private capital, due to the size of its domestic market, its skilled labor force, its geography, and government incentives for FDI,” Suwalski says.

The Polish government’s “Capital Markets Development Strategy” put in place this year – with technical support provided by the EBRD – for the period 2019-2023 aims to boost the country’s investment rate, encourage innovation and develop a deeper, broader domestic capital market partly by improving regulations and incentivizing Poles to save more.

“The strategy has the potential to significantly diversify sources of funding for Polish companies, which often struggle to borrow to finance growth because of their small size,” Suwalski says.

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