AN INTRODUCTION TO OUR EMERGING MARKETS SERIES

As you may know, there are different key characteristics that countries must have to be considered an emerging market. Two examples of those characteristics are having a lower-to-middle per capita income or having some sort of regulatory body as well as a market exchange for investment and common currency. The Morgan Stanley Capital International Emerging Market Index (MSCI Index) is the governing power that categorizes and reports out on new emerging markets.

The term “emerging markets” is exciting for businesses, as it insinuates higher growth rates and higher opportunity in comparison to developed countries. That being said, emerging markets all see an increased climate for sociopolitical instability and volatility. Every emerging market is plagued by one or more of the following: military unease, social upheaval, natural disasters, price shocks, and other causes that create high volatility.

Now that we have laid out the “science,” we are thrilled to introduce you to our “Emerging Market” blog series! We will use this series to educate on the strengths, weaknesses, opportunities, and threats of the present-day emerging markets. We will dive into the year so far, the political climate, risks, and rewards and finally - the biggest areas of opportunity.

In our previous emerging markets blog, we discussed the business opportunities arising in Mexico. In the newest installment of our series, we are traveling to Europe, where we will dive into Poland’s key characteristics that allow them to be on the MSCI Emerging Markets Index. Throughout the article, you will find us discussing foreign relations, Poland’s most opportune areas, and which industries make the most sense for expansion.

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THE YEAR IN REVIEW

As the first country in nearly a decade to be upgraded to a developed market status and the only EU country to have experienced growth every year since joining, Poland represents a unique opportunity for international businesses.

The country has been recording high levels of growth since 1989 and is making strides in catching up with Western Europe. Since 1989, it has increased its GDP per capita by almost 150%, more than any other country on the continent. This is especially impactful given Poland was one of the least affluent countries when it joined the EU in 2004.

Poland’s continued economic growth during 2019 captured the attention of international businesses, especially in the midst of a global economic slowdown. Supported by soaring wages, generous social transfers, and a tight labor market, consumer spending last year was upbeat. In fact, Poland’s growth is expected to continue to expand, bolstered by its sizable population and growing middle class. With persistently strong domestic consumption and higher-than-expected investments, growth is projected to reach around 3%, an impressive performance in the whole swath of emerging economies of Central, Eastern, and Southeast Europe.

With this phenomenal past growth in mind, it is worth remembering that Poland is still only ranked 22nd among the 28 EU member states in terms of GDP per capita in purchasing power parity. Therefore, the country still has significant potential for further growth as time marches forward.

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GOVERNMENT

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REELECTION OF LAW AND JUSTICE

Many analysts forecast that the recently reelected Law and Justice (PiS), a national-conservative, Christian democratic and right-wing populist party, will see more problems with its spending plans thanks to slower economic growth than in its previous term. While the party has seen impressive GDP growth (averaging 5%) in the past, with inflation below target and interest rates at record lows, the budgetary shift toward greater social welfare indicates that spending tendencies will continue despite projected annual GDP slowing to 2.5-3.0% in 2020.

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FRICTION WITH THE EU

On the EU front, PiS will remain at odds with Brussels over a number of issues,  the most prominent of which involves judiciary reform — a subjugation of the courts to political control. Other heated disputes surrounding the bloc’s climate policy, specifically the 2050 ambition of climate neutrality, are expected to take place between Warsaw (the Polish capital city), the EU, and several other prominent member states. Tension from these debates casts a shadow of doubt over Poland’s future, as the country is the largest recipient of EU structural funds, receiving €110 billion ($130 billion) in the 2014-2020 funding period (2.5% of GDP). The potential for loss of these funds is particularly worrisome given that the boom in fixed investment since 2016 has coincided with the country’s increased utilization of these funds for big public infrastructure projects.

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PRESIDENTIAL ELECTION 

The Polish presidential election is slated for May of 2020, and while Polish presidents do not hold as much power as their French and US counterparts, they are constitutionally more powerful than most heads of state in the region. Furthermore, increasing partisanship in Polish politics will pose an interesting opportunity for the new incumbent to claim a bigger role than his/her predecessors.

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WEIGHING RISKS AND REWARDS

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LABOR SHORTAGE

Poland is at an advanced stage in its demographic transition, with the working-age population expected to decrease by 8% by 2030. The shortage of labor will eventually weigh heavily on potential GDP growth and be exacerbated by the early retirement of an increasing share of the workforce. In addition, automation is rapidly changing the global labor market, with activities currently performed by humans being taken over by machines. While there is the potential for the process of automation to create new jobs, it will be interesting to see how the Polish workforce navigates the shift.

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EXPANSIONARY MEASURES

Poland’s 2020 political calendar is filled with EU, presidential, and general elections all taking place within the year. This plethora of elections has inspired a range of expansionary policies, such as measures to increase social benefits, lower tax rates, and inflate the cost of pension payments. All of these policies will put pressure on public finances, but the political cost of reversing these decisions means they’re here to stay, regardless of their effect on Poland’s fiscal position.

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POSSIBLE GROWTH OPPORTUNITIES

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ENERGY

Poland is the 9th largest producer of hard coal in the world, producing about 78 megatons of hard coal per year; however, the country is also the second-largest consumer of coal and most of the product is utilized to generate electricity at coal-based power stations. The Belchatow Power Station, located in the Lodz region of Poland, is Europe’s biggest coal power station and generates about 20% of the energy consumed in Poland.

However, coal-based power generation incurs a high fee in EU carbon emission costs, so the country has recently adopted measures to move towards more renewable energy sources. Poland continues to present significant development potential for renewable energy sources such as wind, solar and hydroelectric power, which have all recorded significant growth in recent years. Specifically, thermal power plants hold large potential for development, as more than 50% of these facilities are older than 25 years old.

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MANUFACTURING

Accounting for about 4% of the country’s GDP, automotive production accounts for 11% of the country’s total industrial output, making Poland the world’s 23rd largest vehicle manufacturer and Eastern and Central Europe’s largest producer of light vehicles. The automotive sector in Poland has seen rapid growth since the collapse of the Soviet Union but experienced its most significant growth after the country became part of the European Union in 2004. Annual exports from the automotive sector are valued at over €15.7 billion, translating to about 16% of the country’s total exports.

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AGRICULTURE

With 60% of the country’s land area used for agricultural purposes, it comes as no surprise that agriculture is one of Poland’s biggest industries. 3.8% of the country’s GDP is attributed to agriculture and most of this output can be attributed to about 2 million family farms, which employ about 27.5% of the Polish labor force. Grains are the most important crops in the country, especially wheat, oats, barley, and rye. Poland has the world’s second-largest potato production and is the sixth-largest producer of milk and pigs in the world.

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TOURISM

With its abundance of natural scenery and historic landmarks, Poland attracts thousands of tourists every year. Since becoming a member of the EU in 2004, the country has experienced a surge in tourism, and was regarded as the world’s 16 most-popular tourist destination in 2016, with an estimated 17.5 million foreign visitors. Since then, the numbers have only grown with over 18 million visitors in 2017 and 19.6 million in 2018. Poland’s growing tourism market has attracted the attention of international brands such as Accor, Marriott, Best Western, and Hilton. Additionally, revenue is expected to show an annual growth rate (CAGR 2020-2023) of 3.8%, resulting in a market volume of US$4,881m by 2023.

We will be highlighting a new emerging market every month and we challenge you to think big for your business. If you’re interested in expanding globally or learning more about potential opportunities, please reach out to us via our contact page or email us at hello@castusglobal.com.