The headlines in the Financial Times from June 9, “Poland vows to end free market approach despite economic gains” and June 12, “Foreign fund managers retreat from Poland” make the situation sound more frightening than it really is. I am not saying that looking to nationalize certain parts of the Polish economy is good; I just believe that they are putting Polish interests ahead of the European Union. Why now you may ask? The answer is twofold. First, the Law and Order party that was elected late last year is politically conservative, but not in the terms that we think; and second, they can see the writing on the wall—that is, the ultimate demise of the EU.
Since the end of communism in 1989, the Polish economy has grown steadily.They were the only country during the financial crisis of 2008/2009 to eke out positive GDP growth. Investors need to look at the new conservative government as being more nationalistic than anything else. The problem with being part of the EU is that nationalism is viewed as archaic, but that is wrong. Poland’s interests must come first, but according to Brussels they are not to behave as a separate nation.
Historically, Poland has looked to the east, and in particular Russia, for its trade and should be allowed to continue. Also going against European thought, they have refused to accept Syrian refugees and let other more welcoming countries like Germany shoulder the burden.
Economically, the World Bank has projected the GDP growth for 2016 will be somewhere around 3.7%, but that growth comes on the back of government handouts in the form of monthly support payments for parents with two or more children. Not what I would call conservative economic thought!
In the June 12 Financial Times article, author Aliya Ram writes that large fund managers have begun to exit or scale back their exposure to the country because of what they feel are political insecurities. At the beginning of the year, Standard and Poor’s downgraded Poland’s credit rating to BBB+ from A- and that in itself sent shock waves through the economy. One of their reasons was that the new government has weakened the independence of key institutions. Of course the government felt the downgrade was politically motivated, and to bolster its argument both Moody and Fitch confirmed their previous ratings.
But what is of more concern is if the EU decides to move ahead with its threatened legal action by launching a first ever probe into rule of law in a member state.That should send shivers down the spines of investors because of the possible Polish retaliation. If Britain exits the EU, then look to others to do the same, starting with Poland. Europe right now is off my list of investment destinations at least until the dust has settled from the Brexit vote and the Spanish elections later this month.
Peter Kohli, CEO of emerging market specialist DMS Funds.