Poland has travelled a great journey over the last 25 years from the days when Lech Walesa of the Solidarity party was elected president of Poland in December 1990 as communism collapsed. President Walesa became nationally and globally well known after he led the Gdnask shipyards to dramatic labor strikes in the early 1980's confronting the communist leadership head on. Significant developments have taken place since this change in political ideology towards free market and democracy. The 1990's were overall a decade of tremendous success for Poland including its membership to the OECD in 1996.
During the late 1990's, the zloty finally stabilized and benefitted from strong foreign direct investment (FDI) capital inflows into Poland. This movement of inward capital was linked to Poland's privatization programs and foreseeable entrance into the European Union (EU) of which it obtained membership on May 1, 2004. Poland with a population of 38.5 million is Central Europe's largest economy. In addition, specific domestic macro-economic variables like strong GDP growth rates and a relatively stable banking system have attracted foreign capital resulting in appreciation pressures on the zloty.
POLITICS: Minister Donald Tusk (PO – Civic Platform) came into power November 2007 with a platform of lowering taxes, reducing public sector growth and to implement pro-business policies. The current coalition government is pro-European Union and pro euro membership.
ECONOMY: economic performance has been very strong particularly since European Union membership in 2004, an economic boom with good GDP growth rates has endured for Poland with a lowering of taxes and bureaucracy associated with trade. the 1990’s, Poland's economy has increased by 30 percent which is very impressive when compared to other transition economies from the former communist bloc. Privatizations of thousands of Polish businesses have taken place as the economy has restructured. Immediate challenges for the centre-right government is to control spending and to further bring down the fiscal & current account deficit. Major areas of industry in Poland include coal, steel, agriculture, industrial manufacturing. Small scale entrepreneurs have been the key engine of economic growth for Poland. Income discrepancies are still prevalent amongst various EU member countries, German workers earn on average 2.5 times more income than Polish workers. Upwards of 500,000 Poles since 2004 have emigrated to Western European countries such as Ireland, United Kingdom, Germany, etc. to take advantage of higher incomes, this population exodus has led to a lowering of Poland’s unemployment rate.
Economic Statistics
Total GDP stands at 620 billion USD as measured by purchasing power parity with corresponding GDP/Capita at 16,300 USD, well below EU average at 33,500 USD (2007), market GDP at 420 billion USD. GDP growth for year 2007 came in at 6.5 percent, real GDP growth for 2008 estimated at 5 percent, 2009 at 4.5 percent. Year 2008 inflation forecasted at 4 percent, 2009 at 3.8 percent, December 2007 inflation at 4.1 percent, for comparison - inflation for year 1997 at 15 percent. The current account deficit has declined from a peak in 2000 at 6.2 percent of GDP to 2 percent of GDP in 2003. It is currently running at 5 percent of GDP with the trade component is in deficit estimated at 4.3 percent of GDP for 2008. Public debt to GDP ratio at 43 percent (2007). External debt at 52 percent of GDP. Unemployment has declined to 8 percent.
POSITIVES: pension and healthcare reform implemented, current account deficit covered by strong FDI inflows, high savings rate, established institutions, Polish firms are now more efficient, financial markets function well, credit rating upgrade in 2007. CONCERN: government corruption is evident, rigid labor code, flashes of political instability, net energy importer, infrastructure upgrades are required, large & inefficient public sector.
REGIONAL ANALYSIS: Norway, Germany, Russia
Norway is a major natural gas supplier. economic downturn in Germany will impact Poland somewhat as Germany is Poland's largest trading partner although the other EU member countries may pick up some of the lost trade. Many Poles work in agriculture in Germany harvesting the crops. For further details on Poland’s current sensitive relationship with Russia, send us an email here at BankINTRO.com.
BANKING SYSTEM: well capitalized and profitable. In early 1998, the government lifted foreign ownership restrictions on Polish banks, industry privatization began to take place. Poland's central bank, the National Bank of Poland (NBP) is independent. Acceptable inflation band by the central bank is 1.5 to 3.5 percent annual inflation. Major support for the zloty is Poland's official reserves position at a very healthy 85 billion USD as of July 2008. Distrust of the Polish banking system is noticed amongst older and rural Poles. Many Poles hold cash or mattress money.
Polish interest rates have increased since April 2007 to a level of 5.75 percent in April 2008. As of August 2008, Poland’s rediscount rate stands at 6.25 percent. Interest rates in Poland are presently higher than both the Eurozone's ECB rate at 4.25 percent and the United States at 2 Federal funds rate. igher interest rates in Poland have helped the zloty appreciate over the last year as it has attracted strong EU capital inflows.
CURRENCY: ISO Symbol ‘PLN’, former symbol 'PLZ', Polish zloty. At time of review on August 27, 2008, the zloty was valued at 2.265 PLN to 1 USD and/or 3.33 PLN to 1 Euroland euro (EUR). The zloty has appreciated tremendously in value to the USD since 2002 from the 4 PLN to the 2 level. The euro is also in use unofficially in Poland. Managed floating exchange rate regime is in place. As of August 26, 2008 as measured by purchasing power parity, the PLN was 16 percent undervalued to the USD.
CURRENCY HISTORY: January 1995, currency reform was implemented with increased privatization and drastic economic reforms setting the foundation for EU membership. On January 1, 1995 currency reform saw 10,000 old zlotys (PLZ) replaced with 1 new zloty (PLN) in a redenomination. Previous to currency reform, valuations for the old zloty included year 1994 at 22,723 PLZ to the USD, 1993 at 18,115, 1992 at 13,626. Valuations for the ‘PLN’ zloty have November 1995 at 2.48 PLN to 1 USD, January 1996 at 2.51, January 1997 at 2.93, January 1998 at 3.53, January 1999 at 3.52, January 2000 at 4.09, January 2001 at 4.10, January 2002 at 4.06, August 20, 2002, the zloty was valued at 4.14 PLN to 1 USD, May 2003 at 3.746, December 2004 at 3.096, September 2005 at 3.2, August 2006 at 3.05, May 2007 at 2.79, July 2008 at 2.06. Various versions of the zloty have been in currency use within Poland since the 14th century.
CURRENCY FORECAST: Poland as the largest EU candidate official member country is now getting closer for entrance into ERM2 which could be attained by late 2009-10. two year exchange rate mechanism tenure may see Poland adopt the euro as early as 2012, however, Poland’s current government is proceeding with care. As the zloty is a liquid currency, it is attractive to currency speculation. The authorities want to ensure that the economic fundamentals are very sound to discourage predatory currency speculators and derail the EUR membership coupled with a risk to throw the economy into a deep stall or recession. Euro membership is probably more likely by 2015. government is close to meeting EUR entrance goals with Poland inflation hovering close to the EU 3.4 percent inflation ceiling requirement while Poland’s year 2007 fiscal deficit at 2 percent of GDP is below the EU’s 3 percent fiscal deficit guideline.
The zloty is likely to trade in a band close to current valuations. PPP suggest minimal change to the USD, the EUR may begin a cyclical slide on a trade weighted currency valuation so the PLN may realize minimal appreciation to the euro in the medium term. In the very short term, the PLN may depreciate ever so slightly to the EUR as EU capital flows reverse and go back home to the Eurozone. The long term outlook for the Polish zloty is favorable.
