The title of this commentary may come as a surprise. Over the past year and a half, the sovereign debt crisis in the Eurozone has dominated European issues in the financial press. There has been little mention of the Central and Eastern Europe members of the European Union, with the exception of disturbing news about political developments in Hungary. Quietly, the Polish economy has been registering outstanding performance, despite a very difficult environment. Unlike other EU economies, Poland avoided a recession in 2009, achieved 3.9% growth in 2010 and, according to the latest data, grew at a 4.3% rate in 2011. The latter rate contrasts with 1.5% for the Eurozone and 3.1% for Germany.
Poland has benefited from sound economic policies, which have included anti-crisis expenditure on infrastructure and for the 2012 UEFA European Football Championships. This expansionary fiscal policy was possible due to Poland’s relatively small public debt. Also, Poland’s currency, the zloty, depreciated by some 50% vs. the euro from 1/31/2008 through 2/19/2009. Eurozone economies, with the euro as their common currency, lacked this option of a flexible currency. The effects were dramatic. Last year, despite the slowdown in Europe, Poland’s exports advanced by 10.5%. Also, investment grew at a strong 8.7% rate.
Poland’s financial sector is in good shape, and investor confidence in the country appears to be strengthening. Last week Moody’s assigned to Poland its highest short-term Prime-1 credit rating. Poland’s Finance Minister proudly pointed out that for the first time, five-year Polish credit default swaps (CDSs) were trading below French CDSs, having previously declined in cost below those of Spain, Italy, and Belgium. Poland’s equity market, as measured by the MSCI Poland equity market index, is up 19.86% year-to-date as of March 19th.
These positive developments have occurred despite expectations and some indications that the Polish economy will moderate this year to a growth rate in the 2.5 – 3.0% range, mainly because of the recession in most of the rest of Europe. Such growth would likely still lead the rest of the European Union. The currency has firmed a bit recently. Inflation is becoming a serious concern for Poland’s Monetary Policy Committee. Inflation in February was a higher than expected 4.3%. A rate hike is looking likely sometime in the coming months. Conditions in the labor market have softened somewhat. Industrial production in February was surprisingly weak, an annual increase of 4.6%, as compared with January’s 9% advance.
Poland’s equity market should be able to maintain pace with the stronger European markets, in particular that of Germany, this year. There are two Poland ETFS currently available to American investors. The most liquid is the iShares MSCI Poland Investible Market Index Fund, EPOL, which is up 18.33% year to date and has an expense ratio of 0.59%. The other is Market Vectors Poland ETF, PLND, which is up 18.62% year-to-date and has an expense ratio of 0.67%.
I am looking forward to the opportunity to compare my views on the Central and Eastern European economies with those of regional experts and high-level officials at the May 23-27 GIC meeting in Warsaw and Cracow, Poland, The Economies of the Baltic Sea Countries and their Capital Markets (see here for the program). Poland’s recent positive experience with a flexible currency, noted above, and its plans to nevertheless adopt the euro as its national currency will surely be featured in the discussions.