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Poland Election Heralds Uncertainty, Not Panic

Poll-leading party Law and Justice has a euroskeptic-leaning agenda, though that’s not the policy plank that poses the most investment risk, say analysts.

Poland, the European Union’s sixth-largest economy, looks likely to hand power this weekend to a conservative, euroskeptic party that plans to boost social spending while promoting domestic champions.

Polish voters head to the polls this Sunday with the Law and Justice party, known by its Polish acronym, PiS, projected to win a resounding victory over the centrist incumbent Civic Platform (PO). Under the PO’s leadership, Poland was the only EU member state to dodge recession in 2009 and has reaped great benefits in terms of infrastructure and industrial development from its decade of EU membership. But the sense that PO has run out of steam and let down millions of Poles who feel left out of the economic boom should return PiS to power, putting ten-year incumbent member of the Sejm (lower house of parliament) Beata Szydlo in the prime ministership under her fellow Krakow resident President Andrzej Duda, elected in May.

A recent opinion survey by Warsaw-based polling company IBRiS put support for PiS at 36 percent of the vote, well ahead of PO at 22 percent. It also indicated that four other parties would enter parliament: The United Left, which contains elements of the former Communist Party, was at 11 percent, whereas three smaller parties — the liberal party Nowoczesna, the Polish People’s Party (PSL) and the antiestablishment populist movement Kukiz’15 — polled at 6 percent.

Only a year ago, the current governing coalition of the PO and PSL seemed destined to retain power. But then the PO lost Donald Tusk, its charismatic leader and prime minister, when he left to become president of the European Council, the EU’s ministerial body. Then Duda, a young lawyer, upset incumbent Bronislaw Komorowski in Poland’s presidential election, his energy contrasting with that of his staid Civic Platform rival.

Analysts have warned of a raft of populist policies from a PiS government and potentially a more dovish monetary stance, since the new government will have to make several appointments to the central bank’s monetary policy committee. The shift toward a more state-interventionist economic model skeptical of diktats fromBrussels and euro zone obligations follows a trend across Central and Eastern Europe, notably in Hungary, where the populist-nationalist Fidesz government of Prime Minister Viktor Orbán has imposed taxes on sectors dominated by foreign investors, including banks, supermarkets and advertisers — thus foreign-owned media — has fought running battles with Brussels and been accused of undermining the media and independent institutions, such as the central bank and the constitutional court.

“The upsurge of nationalist and euroskeptic populism in Central and Eastern Europe is a phenomenon that warrants caution among investors,” says Luka Oreškovic, a specialist who lectures on Central and Eastern Europe at Harvard University. “Orbán’s authoritarian model has become a type of role model for nationalist and euroskeptic parties in the rest of the region.”

Poland’s strong GDP growth is unlikely to be derailed, though, Oreškovic says, with 3.5 percent expansion expected in 2015 and 2016.

Indeed, concerns about the outlook for Poland should not be exaggerated. The PiS’s program is arguably not so radical as it has been portrayed, and some of its proposals may not survive the realities of government.

If PiS were to land an outright majority, it would have greater scope to implement its program, which includes raising benefit payments to households with children and a proposal to raise the income tax threshold; reversing the PO’s decision to raise the retirement age, from 67 back down to 60 for women and 65 for men; establishing a minimum wage at 12 zloty ($3.18) an hour; and cutting the value-added tax by 1 percentage point, to 22 percent.

PiS is also resisting bearing some or all of the cost of converting $39 billion worth of Swiss franc mortgages into zloty. Swiss franc loans are worth 8 percent of Poland’s GDP; consequently, since Switzerland stopped pegging the franc in January, these loans have had a sizable impact on the Polish economy. PiS is also weighing either a 0.14 percent tax on financial transactions and a 0.07 percent on derivatives trading, to deliver 1.7 billion zloty, or a 0.39 percent tax on banking assets, to bring in 5 billion zloty. Several of these policies — including a cut in VAT and a minimum wage — have also been proposed by PO, and critics see Civic Platform’s pledge to bring the deficit down to 1 percent of GDP in four years as unrealistic.

Gabor Ambrus, an economist at Royal Bank of Scotland in London, asserts that the most troubling issues for investors are the retail tax, the conversion of Swiss franc loans and the proposal to tax banks. These could undermine Poland’s appeal as an investment destination, he warns.

Waldemar Dubaniowski, who is involved in PiS’s economic policymaking, tells Institutional Investor that the party is considering imposing taxes on multinationals to rein in the deficit, help finance tax cuts and provide incentives for small and medium-size business, investment and innovation. Hungary has similarly raised taxes on sectors dominated by foreign investors, including banking and telecom, while trumpeting support for SMEs — and, say critics, supporting companies linked to the ruling party.

“There seems to be an increasing understanding — at least in Hungary in Poland — that foreign investors should not have privileges over domestic ones to the extent that that was the case in the past — and still is the case in several areas,” says Marcin Mrowiec, chief economist at Bank Pekao in Warsaw.

Marek Matraszek, founding partner of Warsaw-based consultancy CEC Government Relations, says Law and Justice’s alleged populism and nationalism have been exaggerated. PiS’s economic policies are “mildly left-of-center,” he contends, and the party is “fully engaged in Europe — it only wants to argue Poland’s case more robustly,” rather than advocating for withdrawal from the EU.

“As for the implications for investors — yes, they will face a little more taxation in some sectors and some more regulations,” says Matraszek. “But in what sense is that worse than something in France or Italy?”

Many analysts question the extent to which PiS will be able to implement its program. Many a Polish politician has fallen short of delivering on lofty election promises. Parliamentary arithmetic and constitutional challenges to Swiss franc conversion may also act as checks. Most important perhaps is Szydlo’s pledge to keep Poland outside the EU’s excessive deficit procedure, would require the government to keep the deficit within a ceiling of 3 percent of GDP. A PiS majority in the Sejm would be negative for the outlook on the deficit issue, RBS’s Ambrus argues, as PiS will have more scope to implement all its policies, unconstrained by a coalition partner or the risk of an early election.

Analysts see little risk from Law and Justice’s skepticism toward the euro. Szydlo has said that any government she leads would not adopt the common currency, notwithstanding Poland’s obligation to do so at some stage as an EU member. But the party’s stance accords with the views of most Poles, who have seen how being outside the euro zone helped Poland better absorb the shocks of the past seven years. Even the PO government, which paid rhetorical fealty to eventual euro adoption, never proposed concrete plans for doing so.

A final issue looming on the horizon is the replacement of most of the National Bank of Poland’s Monetary Policy Council and president Marek Belka, when their terms expire next year. All but one member of the MPC is up for replacement, and there has been speculation that a PiS-led government — or indeed a weak PO-led administration — would appoint more dovish members. Having control of both the presidency and parliament would give PiS considerable scope in appointing new members. PiS policymaker Dubaniowski insists that the central bank will remain independent, while Bank Pekao’s Mrowiec points out that the single-term limit for committee members has tended to reinforce the body’s independence and professionalism.

The most significant macroeconomic risks are external: the state of the euro zone economy, the repercussions of China’s slowdown and potential reverberations from U.S. monetary policy.

“Competitive wage growth and salary levels relative to productivity, minimum infrastructure risks, cheaper materials for construction and real estate, and a skilled labor force mean Poland will remain an attractive destination despite a PiS-led government,” says Katya Kocourek, lead Central and Eastern Europe analyst in the due diligence practice of management consulting firm Stroz Friedberg in London.

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