The curiosity of credit managers is our strength. Through our contact with other global institutes we’ve made contact with the Polish Institute of Credit Management who’ve prepared this detailed overview on Poland and its strengths and challenges

Poland's economy is one of the more robust of the post-Communist countries and is one of the fastest growing within the European Union. Having a strong domestic market, low private debt, flexible currency, and not being dependent on a single export sector, Poland is the only European economy to have avoided the world economic crisis of 2007-08.

“Poland has the potential to be the fastest-growing large economy in the EU”, PwC has said in a report released in 2017 that noted long-term global perspectives to 2050. “Emerging markets will continue to be the growth engine of the global economy,” the report added. But as every fast-growing company needs good management, the country should have a structural frame to develop high-quality staff in every part of the economy, including credit management.

Poland has a convenient location – it’s located in the centre of Europe, at the intersection of main communication routes – it is like a bridge between Western and Eastern Europe. This is a great advantage for potential investors. They not only have easy access to the Polish internal market (approximately 38 million people) but also to the markets of other European countries (over half billion of people). Another advantage is the benefit that comes from participation of Poland in different global organisations like the European Union, United Nations or NATO. Poland is therefore potentially politically stable and has a significant position on the international arena. From an economic point of view Poland is also reliable, the economy was not as affected by the global crisis as the economies of other European countries but has additionally strengthened its position in the CEE and Europe as a whole during the crisis.

Past successes

Since 1989, the country’s GDP per capita more than doubled, coming ahead of all European peers. Exports increased more than 25 times and came close to $250 billion in 2013. Since 1995, Poland has also grown faster than all large economies at a similar level of development, as reflected in average GDP per capita growth. After 23 years of uninterrupted growth, it is close to beating the world’s historic growth records and were likely the best in Poland’s history.

It is remarkable that Poland’s growth has been based on brain power, entrepreneurship, and hard work, not on natural resources or financial steroids. Poland is a net energy importer and its public and private debt levels (50.6%) are well below the European average (81.6%). Finally, the outstanding growth in the last 20 years has not come at the expense of the poor. Inequality increased following the transition, but then it came down (Gini coefficient: 0.292) and now floats around the EU average (Gini coefficient: 0.303).

During the last two decades, Poland expanded the quantity and quality of education. Today every second young person studies at the university level, above the EU average, up from only one out of ten in 1989. Despite relatively low spending on education, young Poles are also well educated: according to the OECD PISA study, Polish 15-year-olds are more functionally literate than most Western European and North American peers.

Poland benefited a lot from large inflows of EU funds that helped connect Poland with Western Europe by highways for the first time ever.  For last 15 years Poland has actively invested in infrastructure – road and rail transport as well as energy infrastructure has undergone a thorough transition.

Present challenges

But Poland has a backlog of challenges ahead. The list includes, among others: demography, relatively low level of private investment, bureaucracy, complexity of fiscal regulations and poor innovation.

First of all: Poland is aging fast. In 1950, the median age was 25.8 and half of the Polish population was younger, half older. Today it is 38.2. It will be 51 in 2050.  The population has also started to decline: from 38.6 million in 1995, to 38 million in 2010, to an expected 32 million in 2050. There are two main reasons for Poland’s population decline: low birth rates and a continued emigration.

Aging and demographic decline have consequences on the economy. An aging and smaller population implies an aging and smaller work force. European Commission’s researchers project that Poland’s potential growth in GDP per capita – that is, the long-term growth trends beyond the ups and downs of the economic cycle – would decline from 4.7% of GDP to 3% of GDP after 2021, due to the aging of the population. To mitigate the impact of such demographic trends on the economy more people need to work within the working-age age group. What economists call “labour force participation” remains low in Poland, in particular for the young, the women, and those over 55. The difference between Poland and other EU countries is greatest in the case of older workers, in large part because of generous rules for early retirement. Only 35% of persons aged 55-64 are economically active compared with the EU average of 51%, 58% in Chile, and 62% in Korea. 

The next thing is the poor level of investment, particularly in the last few years. 2Q 2018 GDP growth statistics confirmed a slight decline from 5.2% to 5.1% year on year. Domestic demand, with the dominant contribution of consumption (2.9pp), is still the main driver of growth. The contribution of net exports improved (0.5pp). However, the most important element in the data was the deceleration in investment to 4.5% YoY from 8.1%, despite growth in local government spending and double-digit increase in investment spending of large companies (14% YoY). This suggests very poor investment expenditures of small and medium-sized enterprises which constitutes around 50% of Polish GDP. Investment decisions without the large companies are very careful. This weakness is caused by the recent introduction of new regulations on VAT (so-called “split payment”) as well as regulatory and legal instability.

EU membership has been a positive factor in enhancing efficiency of the judicial system. However, problems still exist. According to the World Bank Business Environment and Enterprise Performance Survey, the slow pace of court proceedings is considered to be the major problem, with only 12% of Polish respondents considering that the court system is sufficiently fast. Enforceability of court judgments is another significant problem, with only a third of business respondents believing court judgments can be effectively enforced. Concerns also continue about corruption and lack of impartiality. Overall, two thirds of businesses surveyed believed courts posed an obstacle to doing business. Poland has made significant progress towards implementing an effective judicial system, however there is much room for improvement.

Speaking about competitiveness, Poland is ranked 27 among 190 economies in the ease of doing business, according to the latest World Bank annual ratings. The rank of Poland deteriorated to 27 in 2017 from 24 in 2016. Ease of Doing Business in Poland averaged 46.2 from 2008 until 2017, reaching an all-time high of 72 in 2009 and a record low of 24 in 2016.

The low level of investments implies poor innovation. Polish firms are competitive on international markets as their strong export performance shows. However, they compete mainly on price, and few firms, particularly among SMEs, invest in R&D and innovation activities. This results in low ratios of Business Enterprise Research and Development (BERD) and patents to GDP. According to OECD data, Poland spends only around 1% of GDP for research & development.  The OECD average is 2.3%. Poland registers yearly around 100 patents in so called Triadic patent families (European Patent Office, Japan Patent Office and the United States Patent and Trademark Office). This is 3-times higher than in Czech Republic but 3-times lower than in Spain for instance. According to the latest Bloomberg Innovation Index, Poland is ranked at 25th place. This is above the neighboring countries, like Czech Republic (31st), Hungary (32nd) or Slovakia (42nd), however the country noted a drop from the 22nd place last year. This is also well below the ambitious of one of the biggest economies in the European Union.

Main risks and role of Polish Institute of Credit Management

So, what are the risks every credit manager is taking now into account in Poland?

The first thing is to understand the following paradox: despite of dynamic GDP growth, the number of insolvencies in Poland is increasing year over year. The last available data shows +14% of bankrupt firms in the first half of 2018 compare to the same period a year before. Why is that? Companies frequently experienced increases in turnover, but lesser increases in profits. Profits were constrained by rising costs, including wage growth and the higher costs of inputs – as confirmed in accelerating producer price indexes. We see that across the board, but especially in construction sector.

The high pressure on wage growth is caused by the situation on the labour market, with the lowest in the modern history unemployment rate of 5.8% (one of the lowest in Europe). It is worth to mention that only 14 years ago, this macroeconomic indicator was on 20% level. Poland desperately needs workforce, so the other countries in the region. Due to demography, this need cannot be fulfilled by Poles and country’s economy will not expand without foreigners. The problem is that the immigration policy almost does not exist. Today we already have over 2 million of Ukrainians working here, but over 50% of them declare to leave Poland and work in countries with better wages in EU, particularly in Germany. Our main advantage, i.e. the low labour cost is coming to an end. We need something else to move further.

No matter what, the key to further growth of businesses in Poland is increase in the efficiency. Without that, many of them are at risk to fall. That is why Poland should put the innovation in the first-place. The innovation not only in products & services, but in the business processes, including more efficient credit management and entire order-to-cash management. And this is the value the Polish Institute of Credit Management (PICM) adds to the Polish businesses.

Robert Dyrcz
Founder, COB
Polish Institute of Credit Management
T: +48 12 312 80 52

December 2018

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