Emerging

Unchanged potential growth

rd  
Eco Emerging // 3 quarter 2021  
economic-research.bnpparibas.com  
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POLAND  
UNCHANGED POTENTIAL GROWTH  
Covid-19 was only a temporary brake on Polish growth. The economy is outperforming its neighbours’, with a  
shallower recession in 2020 and an earlier recovery. Credit risk appears to be under relatively good control, despite  
high levels of participation for the loan repayment moratorium scheme. Supply side constraints are even raising  
fears of a temporary overheating of the economy, with an increase in inflation. However, a strong current account  
surplus and the good control of government debt are stabilising factors. Poland’s economic growth potential remains  
unchanged, even though the prospect of international tax harmonisation may slow down foreign investment.  
IS THE ECONOMY ALREADY OVERHEATING?  
FORECASTS  
The Polish economy is remarkably dynamic. Real GDP contraction  
in 2020 was one of the smallest in central Europe, and expected  
growth in 2021 and 2022 is faster than it was before Covid-19 struck.  
The manufacturing PMI hit fresh record levels and manufacturing  
production (more than 30% of GDP) has consistently been above its  
pre-Covid levels since October 2020.  
2
019  
2020  
2021e  
2022e  
Real GDP growth (%)  
4.7  
-2.7  
3.4  
5.3  
5.4  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt / GDP (%)  
2.1  
4.5  
4.1  
-0.7  
45.6  
0.5  
-7.0  
57.5  
3.5  
-4.0  
57.0  
3.8  
-2.5  
55.0  
3.7  
Household consumption has proved particularly resilient, with retail  
sales returning to pre-crisis levels in the final quarter of 2020. A fresh  
wave of infections and the tightening of restrictions in March and April  
did result in a loss of activity. However, retail sales bounced back in  
May.  
Current account balance / GDP (%)  
External debt / GDP (%)  
59.3  
114.5  
5.1  
61.9  
125.6  
5.9  
56.6  
140.0  
5.9  
50.0  
150.0  
5.7  
Forex reserves (EUR bn)  
Forex reserves, in months of imports  
e: ESTIMATES & FORECASTS  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
The Polish economy’s solid performance is primarily the result of the  
strength of exports. The rapid acceleration in the final quarter of 2020  
has continued into the beginning of 2021: exports are not only much  
higher than in 2020, but are also above their (pre-Covid) level of 2019.  
Poland is enjoying the full benefits of a powerful wave of investment  
in recent years (notably from FDI), which has expanded the country’s  
export capacity.  
The strength of exports has kept the current account in surplus (3.8% of  
GDP in 2021) despite the upturn in domestic demand. As a result, forex  
reserves are now at the comfortable level of nearly 6 months’ imports.  
The only negative point has been the marked acceleration in inflation.  
In May, the year-on-year increases in production prices and consumer  
prices hit 6.5% and 4.8% respectively, from 0.1% and 2.3% respectively  
in December 2020. This inflationary pressure has come in part from  
higher oil prices. On top of this, however, there has also been a  
significant rebound in capacity utilisation rates, a shortage of some  
inputs (labour, semiconductors, plastics, metals) and logistics issues.  
Corporates are facing pressure on their margins, as increases in their  
production costs are outpacing those in their selling prices.  
TABLE 1  
MANUFACTURING PMI  
70  
65  
60  
55  
50  
45  
40  
35  
30  
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21  
In parallel, financing costs are set to rise. Inflationary pressures have  
also fed through into interest rates: yields on 10-year government  
bonds were 1.65% on 2 July, up from a low point of 1.15% at the end  
of January (although the July figure is still lower than the yield faced  
before the Covid crisis). For the time being, the Monetary Policy  
Committee remains divided on the opportunity to increase policy  
rates, with some members of the view that this rise in inflation will be  
transitory. However, the markets appear to be expecting a rise.  
CHART 1  
SOURCE: DATASTREAM  
However, as the economy reopened, and with production capacity  
nearly fully used, the need for fiscal support has eased. It is now  
limited to those sectors most affected by social distancing measures.  
The fiscal cost of support measures should be limited to 1.7% of GDP in  
2
021, from nearly 4.5% of GDP in 2020.  
Many measures were also financed by the country’s development fund  
and the public development bank, BGK. These did not affect the budget  
balance but did contribute to the rise in government debt.  
PUBLIC FINANCE: A TEMPORARY BLIP  
Government debt increased by nearly 12 points of GDP in 2020, because  
of both the increase in the government deficit and the financing The financing of the deficit and extra-budgetary support measures was  
provided by public agencies.  
significantly helped by the purchasing of government (and government-  
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3rd quarter 2021  
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guaranteed) securities by the central bank. The bank now holds nearly  
PLN 143 bn (6.2% of GDP) of public debt on its balance sheet, equivalent  
to nearly half of the public debt issued since the onset of the pandemic.  
FDI INFLOWS (EUR BN, 12-MONTHS SUM)  
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8
Poland is likely to be one of the main beneficiaries of European recovery  
efforts. The country could receive nearly EUR 15 billion per year in  
subsidies over the first two years of the European Union’s new multi-  
year budget (2021-2027), with loans on top of this if Poland uses this  
option. The time needed for negotiations before the implementation  
of the European recovery plan (coming on top of structural funds) is  
likely to delay the effective payment. A slight delay in payment will  
delay support to growth. Thus, the effect is likely to be stronger in 2022  
than in 2021, providing a new driver to growth, as the current cyclical  
momentum will probably have been running out of steam by next year.  
16  
14  
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0
8
6
4
2
0
1
CREDIT RISK RELATIVELY WELL MANAGED  
-2  
-
4
11  
The authorities introduced a moratorium on repayments of loans to  
households and corporates, running initially until September 2020, and  
then limited just to corporates (and significantly less widely used) in  
the first half of 2021.  
12  
13  
14  
15  
16  
17  
18  
19  
20  
21  
CHART 2  
SOURCE: CEIC  
At the end of March 2021, 0.8% of loans were still covered by a running  
moratorium. However, 13.5% of loans (in value) had also benefited from  
a moratorium that has now expired. The non-performing loan rate on  
these was 4.6%, more or less in line with the European average. This  
figure is slightly higher than the 3.7% ratio for all loans, which had  
been stable for a year, even though lending by Polish banks to the  
private non-financial sector had not increased (meaning that non-  
performing loans have not been diluted).  
The tax level, which is a pulling factor in Poland’s attractiveness,  
may eventually vanish: the 2018 introduction of special economic  
areas has resulted in tax rates well below the 15% minimum rate  
now being discussed at an international level. The country has used  
this tax approach to attract new investors in the automotive industry  
and in business services mainly. This attractiveness remained strong  
throughout the pandemic. Similarly, Poland has one of the lowest tax  
rates on digital services (1.5%) amongst European nations, but such  
taxes are likely to be harmonised across the EU by 2023.  
Provisioning for loans covered by a moratorium hit banks’ profitability.  
Their return on equity fell from 7.9% at end-2019 to 3.6% at end-2020.  
The Swiss franc mortgage issue has also required more provisioning: a  
ruling by the European Court of Justice has opened the way for loans to  
be cancelled and resulted in a growing number of claims in the Polish  
courts. Although the Supreme Court has yet to rule on the case, local  
banks began to write provisions at around 30% of their net income in  
Completed on 5 July 2021  
2
020.  
Stéphane COLLIAC  
stéphane.colliac@bnpparibas.com  
Against this background, the Polish banking system remains well  
capitalised, with an increase in its capital adequacy ratio to 17.8% by  
end-2020. The sector’s exposure to real estate business (20% of total  
loans to the corporate sector) generated a limited non-performing loan  
rate of 3.2%.  
ECONOMIC GROWTH PROSPECTS ARE UNAFFECTED  
As has been the case everywhere, the Covid-19 pandemic brought  
productivity gains to a sudden stop (because of periods of under-activity  
linked to – admittedly sporadic – lockdown restrictions). But nothing  
suggests that the economy’s growth potential has been lastingly  
damaged. Unemployment is now falling (6.1% in May, from 6.5% at  
its peak in February) although there is still unused capacity in the  
labour market. Moreover, Poland has continued to benefit, throughout  
2
020 and into the early months of 2021, from strong foreign direct  
investment, a source of both expansion in production capacity and  
productivity gains.  
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