Warsaw’s equity market has risen by a third in the last year, mainly on the back of a strong economy, which grew by over 1 percent in the first three months of the year, compared with 0.3 percent in the US and 0.6 percent in the eurozone.
Economic growth is expected to accelerate to 3.6 percent this year, from 2.6 percent last year, driven by domestic demand and growing investment.
So, when the European Commission warned it might impose unprecedented sanctions – suspending Poland’s voting rights in the 28-nation bloc due to a “grave” threat to Polish judicial independence – eyes naturally turned to the markets.
On Wednesday, however, it was business as usual, the main market ticking up a tidy 0.25 percent.
European Commission First Vice-President Frans Timmermans has been critical of Warsaw recently
The commission has threatened for over a year to punish Warsaw for its perceived assaults on democratic norms and practises, but – as yet – has done nothing.
Its rhethoric has to date been largely empty, and both the Law and Justice (PiS) government and the markets seem to have priced this into their political and investment calculations, respectively.
Warsaw was also warned by the International Monetary Fund (IMF) in its latest annual report this week to rein in its public finances, by cutting spending and raising tax revenues to avoid breaching EU budget rules and losing the structural funds it receives from Brussels.
It estimated that Poland’s government deficit would come in at 2.9 percent this year – just below Brussels’ 3 percent limit.
Due to its high social spending – including a popular monthly child subsidy of 500 zlotys (125 euros) – Poland was expected to breach EU deficit limits last autumn amid investor concern about its financial position.
But the fund also heaped praise on the Polish economy and therein perhaps lies the rub: markets have long discounted the rhetoric of politicians in post-communist Poland – a sucess story despite its politics.
The Warsaw skyline, with the emerging Central Business District to the left of the Palace of Culture
PiS’ impulses may be darker and potentially authoritarian, but its publicly articulated agenda is still notionally democratic, if a rather muscular version of it.
There is little – as of now – to suggest an EU member whose security and economic interests are so closely tied into its NATO and EU memberships will go ahead with any fundamental disassembling of its own democracy.
At least that seems to be the markets’ take on the current troubling events.
“Poland’s Law and Justice government has been emboldened by the fact that despite its much-criticized policies towards the judiciary since taking power in 2015, economic growth is expected to accelerate to 3.3 percent this year, its fiscal deficit is falling, foreign direct investment (FDI) is stable and tax revenues are rising strongly,” Remi Adekoya, a Warsaw analyst told DW.
“Warsaw seems to have concluded investors will still stick with Poland no matter what,” Adekoya continued.
“The question is have they pushed their luck too far with this latest move as investors could start becoming concerned for the safety of their investments in a country heading for absolute political control of the judiciary.”
Opening of a session of the Warsaw Stock Exchange
Investment keeps on coming
Warsaw bourse’s main WIG index has gained 30 percent since November 2016 and is now only 8 percent off its historic high of July 9, 2007.
Partly due to political scandals in previously popular markets – most notably Brazil and South Africa – and unease about China’s growth model, some investors are looking again at Central and Eastern Europe (CEE).
CEE countries are less dependent on commodity exports but still tend to suffer when the dollar rises, so without a rate rise by the US Federal Reserve, many of them have seen their currencies appreciate strongly, the zloty up 14 percent this year, for example.
Sun not setting on Warsaw as an emerging market
Germany is the largest provider of foreign direct investment (FDI) in Poland.
By the end of 2015 German companies had invested 135.9 billion zlotys in Poland, nearly one fifth of all FDI.
Nearly all German investors (95.6 percent), surveyed by the Polish-German Chamber of Industry and Commerce, declared themselves willing to invest in Poland again.
“Poland may still face budget difficulties, but a major depression is not likely to hit Poland, mainly because its workforce really is cheaper than that of its western neighbors, and European capital cannot resist,” the US political scientist David Ost told DW.