Solid macroeconomic fundamentals but watch out for impact of fiscal stimulus


LOW RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

GDP USD525bn (World ranking 23, World Bank 2017)
Population 38mn (World ranking 37, World Bank 2017)
Form of state Republic
Head of government Mateusz MORAWIECKI (Prime Minister)
Next elections 2019, legislative
  • EU membership
  • Diversified sectoral external trade structure
  • Robust domestic demand
  • Banking sector resilient overall
  • Solid track record of low inflation
  • Strong business environment overall
  • Political and policy uncertainties
  • Slow structural reform progress
  • Pro-cyclical fiscal stimulus in recent years
  • Non-diversified regional external trade structure
  • High external debt burden

Strong growth in 2018, but slowdown ahead

Real GDP growth accelerated to +5.1% in 2018 from +4.8% in 2017. Demand-side details show that growth was entirely driven by domestic demand (+4.6pp) and an increase in inventories (+0.7pp) while net exports made a small negative contribution (-0.2pp). Consumer spending expanded by +4.6% in 2018, slightly down from +4.9% in 2017, and public spending by +3.6% (+3.5% in 2017). Thanks to an increased utilization of EU funding for eligible projects, fixed investment rose by +7.3% (+3.9% in 2017). External trade activity lost some momentum in 2018 but remained overall robust, with exports expanding by +6.2% (+9.5% in 2017) and imports by +7% (+10% in 2017).

Looking ahead, early indicators show a mixed picture. The Manufacturing PMI fell to 47.6 in February 2019, marking the fourth month in contraction territory below the 50.0 threshold, continuing to reflect mainly declining new orders, notably new export orders. Meanwhile, industrial production growth rebounded to +6.1% y/y in January 2019, after it had markedly weakened in Q4 2018. Retails sales growth remained robust at +4.7% y/y in January but economic sentiment in the retail sector faded at the start of 2019. Combined with a deteriorating economic outlook for the Eurozone, Poland’s key export partner, we expect a deceleration of Polish economic growth in 2019-2020. The slowdown will be mitigated to some extent by increased fiscal stimulus likely to be implemented ahead of the October 2019 legislative elections. Overall, we forecast full-year GDP growth of +3.5% in 2019 and +3.1% in 2020.

Fiscal consolidation to be at stake

Poland has a rules-based fiscal policy framework which is a positive, in theory. However, the PiS government that came into office in late 2015 has embarked on a controversial economic policy course. It took a number of measures that have fundamen­tally weakened the independence and effectiveness of key state institutions, such as the constitutional court, public broadcasting, the civil service and the central bank. Moreover, the PiS softened some of the fiscal rules and introduced several fiscal stimulus measures, most of them boosting consumption via increased social benefits. This fiscal loosening indeed supported growth in 2017-2018, though surging capital spending thanks to increased utilization of EU funding and stronger external demand played a bigger role. And owing to the strong GDP growth in 2017-2018, both the fiscal deficit and total public debt declined in relation to GDP despite the lax fiscal policy stance.

Against the backdrop of slowing growth and new fiscal stimulus measures, this positive trend may reverse in the next few years. In February 2019, the PiS announced a new fiscal spending package ahead of the forthcoming legislative elections in October. Again, the proposed measures are focused on social spending to boost consumption rather than on structural improvements. If implemented, the package will support growth – or mitigate the expected slowdown – in the short term. However, as growth in 2019-2020 will nevertheless remain well below the outcome in the previous two years, the recent improvement in public finances indicators is highly likely to reverse. We currently forecast the fiscal deficit to widen from an estimated -0.6% of GDP in 2018 to -1.9% in 2019 and -2.5% in 2020. And public debt is likely to approach 50% of GDP by 2020 after it had declined from 54.2% in 2016 to about 48.6% in 2018. These forecasts are subject to considerable uncertainty as the timing and details about the financing of the stimulus package were not clear yet at the time of writing.


Relative price stability

The monetary policy framework is based on inflation targeting. Since the beginning of 2004, the Monetary Policy Council (MPC) of Poland has pursued a continu­ous inflation target of 2.5%±1pp. As consumer price inflation was below the target range from February 2013 to end-2016 (and in deflation territory in the second half of that period), the MPC lowered its key policy interest rate to 1.5% by March 2015 and has maintained that rate to date. From early 2017 to October 2018, price growth hovered in the lower half of the target range before falling again below the range. In the beginning of 2019, some MPC members talked about possible interest rate cuts in the near future. However, the likely increase in fiscal spending has reduced the probability of any monetary loosening as inflation may rebound again after mid-2019. Euler Hermes expects consumer prices to rise by an average +1.5% in 2019 and +2.5% in 2020.

Moderate exchange rate vulnerability

After stabilizing in 2012-2015, currency volatility increased in 2016, with the PLN experiencing bouts of weakness in the wake of political events such as the start of the PiS government’s implemen­ta­tion of its controversial policy measures in early 2016, Brexit in June, and the election of Donald Trump as U.S. President in November. The losses were mostly recovered after some time and overall the PLN depreciated by a modest -4% against the EUR in 2016. Half of those losses were recovered in 2017 and since then the PLN has experienced modest short-term volatility but relative medium-term stability. Euler Hermes expects continued moderate exchange rate vulnerability to domestic and external shocks in 2019-2020.

External liquidity risk has increased but is still reasonable

The annual current account balance shifted from a surplus of +0.3% of GDP in 2017 to a small deficit of -0.7% in 2018 and is forecast to widen to a still adequate -1.5% or so in 2019-2020. The 2018 deficit was nearly two and a half times covered by net foreign direct investment inflows. External debt has slightly decreased since early 2017 and stood at EUR316bn at end-Q3 2018, equivalent to a still relatively high 64% of GDP (down from 72% in 2017 but up from 46% in 2008).

Foreign exchange reserves rose to a peak of EUR103bn in December 2016 but have since been lower than that. Standing at EUR93bn in January 2019, they were still adequate in terms of import cover, at 4.3 months, though this was down from a more comfortable six months at end-2016. In other terms, however, reserves cover just about 77% of the estimated external debt pay­ments falling due in the next 12 months, which is below an adequate level of at least 100%. And since Poland terminated its arrange­ment under the IMF's Flexible Credit Line (FCL) in November 2017 (which had been recurrent since 2009 and at last offered access to about EUR8bn), it can be concluded that external liquidity risk has somewhat increased over the past two years, even though it is still assessed as moderate overall.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
Germany 25%
26% Germany
Czech Republic 7%
10% China
United Kingdom 6%
5% Italy
France 5%
5% Russia
Italy 5%
5% Netherlands

Trade structure by product

(% of total)

Exports Rank Imports
Vehicles Components 6%
5% Plastic Articles
Furniture 5%
5% Telecommunications Equipment
Electrical Apparatus 5%
4% Crude Oil
Engines 5%
4% Miscellaneous Hardware
Miscellaneous Hardware 4%
4% Electrical Apparatus

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

  • The payment behavior of domestic firms is generally reasonable, with the average DSO at 58 days. Domestic regulations on late payments are more demanding than EU standards while, the government has recently endeavored to adopt new reporting principles and access to data has improved.
  • Amicable and pre-legal collection process are fairly efficient in Poland, especially when a settlement is authenticated by a notary, and can be enforced through fast-track proceedings. Legal action can end up taking a long time, but are quite reliable.
  • Collecting debt from insolvent debtorsis a challenging task and, although debt renegotiation mechanisms have been set up, they are rarely relied upon.

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