Investors in Poland Unfazed By Article 7

Warsaw EBRD annual meeting

Investors don’t appear to have yet reacted to Brussels triggering Article 7 against Poland. Bond yields have increased slightly. WIG 20, the Warsaw Stock Exchange’s main index went up on 20 and 21 December, after the European Commission’s announcement, by 0.3 per cent and returned to its 19 December level on 22 December. The złoty exchange rate hasn’t been affected either. On the contrary, the Polish currency, together with the Czech Koruna, are currently the strongest currencies worldwide.

“It does not seem that the deterioration of relations with the EU and increased internal political polarisation have affected investments, but we believe that there is such a risk,” said the American rating agency Fitch in a statement.

“The potentially negative consequences of the political insecurity triggered by the conflict with the EU are now softened by Poland’s strong [macroeconomic] fundamentals, including strong domestic demand, EU funds and the improving situation on the labour market,” Dietmar Hornung, Moody’s managing director, told Dziennik Gazeta Prawna.

Although economists say Poland passed its limits in Q3 2017, when the economy grew by 4.9 per cent year-on-year, and is not expected to grow that fast in the following quarters, businesses are red-hot, exports are booming, unemployment is going down and the increase in wages is stimulating consumption. In November 2017, retail sales went up by 10.2 per cent year-on-year.  

Both Fitch and Moody’s believe the EU procedure against Poland should not have a short-term impact on public finances or on economic growth, but it ‘illogically bodes’ for the beginning of discussions with the EU on the next budget which is set to start in 2020.  

“A lower inflow of EU funds may hit economic growth, and if the government decided to compensate for the loss of some funds through debt, it would weaken public finances,” says Fitch.

Fitch also believes that in the face of the ‘generally’ pro-EU sentiment among Polish society, an increase in EU tensions may turn out politically costly in the next elections (local elections will take place in 2018 and parliamentary in 2019).

Currently, 88 per cent of Poles are in favour of their country’s EU membership.