White Eagle Rising
To the casual observer, the news coming out of Europe, suggests from the Atlantic to the Baltic, and from the North Sea to the Mediterranean, a dark economic pall hangs over the continent. To be sure, recent developments in Spain and Greece have not been encouraging. The new Greek government is already making noises that the fiscal targets for this year and next will be missed. In Spain, markets are rattled by reports that the province of Valencia has requested financial assistance from the central government in Madrid. This coupled with the recent bail-out package for the country's banks, points at Spain as the next domino to fall.
But, while headlines shift from events in Spain to Greece, from Germany to France, from the UK to Italy, there is one European nation which has managed to avoid the spotlight. In spite of all the financial turmoil elsewhere in Europe, Poland has side stepped many of the fiscal traps ensnaring other countries.
As a result, Polish equity prices (measured by the MSCI Poland Index) are up 8.1% in US terms through July 19th versus a 3.7% loss for the equity markets within the Euro Zone (measured by the MSCI Euro Index). The złoty, Poland's currency, has beyond all expectations, become a safe haven of sorts. This year, the złoty appreciated by 6.1% versus the Euro. And, in the credit markets, Polish government debt yields have actually declined in 2012. At 5.24% for long-term bonds, Polish yields, while high by the standards of Germany (1.30%), are a comparative bargain versus the yields investors are demanding on Spanish government debt (6.59%).
Why the strong showing by Poland? Not being counted among the member states of the Euro has helped. Since the sovereign debt crisis began, Poland has had the luxury, shared by the UK, Sweden, Norway and Denmark — all European Union members but outside of the Euro — of charting its own monetary policy. Such flexibility has helped Poland navigate (so far) successfully through the storm.
A second reason — and, perhaps, a more important explanation — is demographically Poland is a generation or so behind the fiscal and demographic challenges confronting most Euro Zone states. With a debt to nominal gross domestic product (GDP) ratio of 55%, Poland is comparatively frugal even in comparison to such fiscal stalwarts as Germany (81%), Austria (72%) or the Netherlands (65%). This combined with a relatively younger population, albeit by European standards, means that Poland has much more fiscal latitude to invest in infrastructure. With a projected dependency ratio (defined as the percentage of individuals over age 65 to working age individuals from 15 to 64) of just 22% in 2015, few other European nations — Ireland and Slovakia the exceptions — Poland needs less from government revenues to fund pensions.
In addition to the frugality it has shown, the Polish government has also exhibited a greater flexibility to seize opportunities as they come along. An example is the current shale gas drilling boom. Like France and Germany, large expanses of Poland might contain similar geological formations to those found in the United States; unlike France or Germany though, the Polish government is more pragmatic in energy and environmental matters. It views breaking the hold of the Russian energy giant Gazprom on the European natural gas market as a greater danger than the risks from hydraulic fracturing. While exploratory wells drilled thus far have not proven promising, it is still early in the exploration process. If the U.S. experience offers any guide, it may require at least a decade of practice and patience.
There are some caveats. First is the Polish fertility rate. It is among the lowest in the European Union. Unless there is a baby boom, the current demographic advantage will last less than a generation. Second, are labor costs. Poland is not an expensive place to do business; nor is it the cheapest. Despite these, Poland deserves a second look as the white eagle (the symbol on its coat of arms) rises above the European economic storm.
Notes:
The dependency ratio is defined as the ratio of a nation's population over age 65 to its working age population (those between ages 15 and 64). The dependency is a widely used barometer of the number of retirees each worker supports.
The government debt to nominal gross domestic product (GDP) ratio is the ratio of the country's debt issued by its central government to the size of its economy. GDP is a widely used measure of the total goods and services produced (consumed) by a nation over a period of time. Nominal GDP reflects the value of the aggregate goods and services at current price levels. The ratio provides a useful gauge of a country's ability to service its government's debt.
The MSCI Poland Index is a market-capitalization weighted, free float adjusted measure of the change in share prices for companies domiciled in Poland. The index assumes the reinvestment of dividends received, after applicable withholding taxes have been deducted, and is expressed in US Dollar terms. The MSCI Euro Index is similarly constructed and presented. The difference is it includes companies domiciled in Euro member states.
(Sources: EuroStat; OECD; and, MSCI.)
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