Export surge set to continue
But while the first months of the year saw trade with the EU soar at a rate superior to that of the Asian giant itself, others point out that the country is starting from a very low base.
"When you are the dumbest kid in the class, even small gains can look huge," says Jacek Siwicki, managing partner of Enterprise Investors, the country's largest private equity fund. The volume of trade with the old EU 15, which accounts for nearly three quarters of all trade, is still only marginally higher than is the case for the Czech Republic, whose population and GDP are about three and a half times smaller. For all that, export has been the driving engine of the economy and looks set to continue in that vein.
According to last week's report by the Institute of Economic Sciences of the Polish Academy of Science (INE PAN), exports could soar by as much as 25 percent over the coming three quarters of the year, and the dynamic should remain high in the following year. Experts at the institute expect continuing productivity gains to drive investment of export-oriented industries.
Sebastian Mikosz, deputy president at the Polish Agency for Information and Foreign Investment (PAIiI), says the agency expects foreign direct investment (FDI) to recover in 2004 after several years of falls. Mikosz forecasts the FDI level this year to be around zł.32.1 billion ($8 billion), or nearly a third higher than in 2003. That is a crucial statistic for the prospects of foreign trade in the coming years, as foreign companies account for 57 percent of all exports from this country.
The highest export dynamic in recent years has been demonstrated by the auto industry, which is completely dominated by multinational players. Foreign sales of cars soared by 73.6 percent in the year to Q1. While the spectacular failure to attract the Hyundai investment, which went instead to Slovakia, earlier this year does not portend well for the longer-term future of the industry, the country's largest exporters remain Fiat and Volkswagen (VW), which in 2003 both shipped abroad more than zł.4 billion worth of cars. Both car makers also made significant headway in their foreign sales last year, with Fiat boosting exports by 176.9 percent, while VW more than doubled its foreign sales. Moreover, despite our southern neighbour's strong position as Europe's highest-growth car producer, Poland should enjoy growing car sales, as the industry in western Europe continues to suffer from high labor costs and taxation.
Indeed, while the country's average wage at zł.2,910 (610) remains lower than a fifth of the EU average, productivity is now at nearly 50 percent of the Western European average, thus making the country an attractive location to shift manufacturing operations to. Moreover, productivity gains in the country continue to outpace those in the EU by more than double the rate. Last year, productivity gains amounted to 3.7 percent, against 1.7 percent in the established member states. Although Henryka Bochniarz, president of the Polish Confederation of Private Employers (PKPP), points out that these gains are partly offset by high non-wage costs of labor in this country, she adds that they are also high in many other EU countries, and Germany in particular.
It is in this context that Bochniarz puts German Chancellor's Gerhard Schroeder's remarks that the new EU members "compete unfairly" with the established members through lower corporate tax rates. Speaking at the recent European Economic Forum in Warsaw, Bochniarz called Schroeder's criticism "the highest praise we could have hoped for," and said that the urgency with which some of the richest European countries pursue the issue is testimony to the country's potential as a manufacturing base for Europe.
"It [Chancellor Schroeder's criticism] shows that, despite the excessive bureaucracy, we are seen as well positioned to capture an ever-increasing share of the Western European markets," she said. The recent statistics seem to vindicate this opinion, especially with respect to Germany, the country's largest trading partner. In the first two months of the year, the latest period for which the data are available, the country recorded a current account surplus with its western neighbor to the tune of zł.2.9 billion (610 million). That is more than twice the surplus over the whole of the previous year and INE PAN experts predict that the trend is likely to continue. This is particularly impressive in view of the continued stagnation of the German economy, which accounts for nearly 47 percent of exports and almost a third of imports.
While surplus with the EU's largest economy is unlikely to offset gaping deficits with France, Italy and other countries on a sustainable basis, in January it actually produced a small overall current account surplus of zł.191 million. While this is unsustainable in the longer period, since the country will continue to be in need of a high deficit on the capital account, the narrowing trade gap is good news for the economy, reducing threats to the stability of the currency. Last year alone, the current account deficit nearly halved on the previous year to just 1.7 percent of GDP.
April was the cruellest month for the złoty, as political instability roiled the markets, though that is not necessarily bad news from the exporters' point of view. In fact, the strong euro has been one of the main drivers of export growth, since the common-currency zone accounts for more than 70 percent of all foreign trade.
This month's accession is also expected to contribute to export rises, as administrative costs connected to shipments of goods across borders have been taken down, as well as the last remaining customs duties. Krzysztof Trepczyński, deputy director at the European relations department of the Economy Ministry, estimates that, prior to May 1, the procedural barriers added an average five percent to the costs of an export transaction.
But while these short-term factors have been an important reason for the strong export performance of the economy, experts point out that longer-term, more fundamental factors are also at play. The narrowing of the trade gap with Germany, which indicates that Polish exports have been pushing goods from other countries out of the market, bears testimony to this.
Janusz Kaczurba, an expert at PKPP and former ambassador to the World Trade Organisation, points out that the structure of exports is already modern, as high-processed industrial goods account for three quarters of all shipments abroad. While ten years ago, commodities constituted nearly a fifth of all exports, that proportion is now down to just 4.5 percent, with KGHM, a copper giant, and state-owned coal mines accounting for most of this figure. As much as a quarter of exports is in machinery, while vehicles account for 17.5 percent.
But many observers say that the most promising sector is food exports, which constitutes some six percent of all foreign sales. One businessman says he is surprised that in Germany it is still easier to buy Polish gasoline than Polish jam, in reference to PKN Orlen's high-profile acquisition of a large gas-station network across the western border last year. Robert Maciejko, president of the Boston Consulting Group, says that it is in the area of food that the country has the greatest potential for innovation and creating national brands. While another businessman points out that "a brand name with three Z's in it" can serve as a big turn-off in many countries, there is a novelty value to be exploited in domestic foodstuffs. Now, after trade barriers for farm products have been taken down, is the time to exploit these advantages.
Andrzej Faliński, secretary general of the Polish Organisation of Commerce and Distribution (POHiD), says he expects a surge in exports of local foodstuffs through multinational supermarket chains. He estimates that the growth could be in double digits "from the very beginning."
Renata Juszkiewicz, director of Metro Group, a large German retailer, says the chain co-operates with more than 3,000 suppliers in this country and, at the moment, only about 40 of them export their goods to Metro chains in Germany and other countries. She expects that number to grow in the coming months, as 'made in the EU' Polish brands will inspire more confidence in consumers.
Renata Gejło, spokeswoman for Casino Group, which includes the Geant supermarket chain, says the company does not currently export goods from this country through its network, but she promises a change in that respect.
"We are in the process of negotiations," she says. "We are talking about sales both under private labels and under the suppliers' own brands."
Experts are optimistic about the prospects for continued export growth in the near future, but caution is in order.
"The coming economic boom is of a cyclical nature and will be difficult to sustain, unless efforts for fiscal reform and industry privatization are renewed," warns a recent report by the World Bank. In view of the fact that exports have been so closely correlated with FDI levels, regaining the markets' confidence in political and fiscal stability is essential for a sustained strong performance on that front.
"When you are the dumbest kid in the class, even small gains can look huge," says Jacek Siwicki, managing partner of Enterprise Investors, the country's largest private equity fund. The volume of trade with the old EU 15, which accounts for nearly three quarters of all trade, is still only marginally higher than is the case for the Czech Republic, whose population and GDP are about three and a half times smaller. For all that, export has been the driving engine of the economy and looks set to continue in that vein.
According to last week's report by the Institute of Economic Sciences of the Polish Academy of Science (INE PAN), exports could soar by as much as 25 percent over the coming three quarters of the year, and the dynamic should remain high in the following year. Experts at the institute expect continuing productivity gains to drive investment of export-oriented industries.
Sebastian Mikosz, deputy president at the Polish Agency for Information and Foreign Investment (PAIiI), says the agency expects foreign direct investment (FDI) to recover in 2004 after several years of falls. Mikosz forecasts the FDI level this year to be around zł.32.1 billion ($8 billion), or nearly a third higher than in 2003. That is a crucial statistic for the prospects of foreign trade in the coming years, as foreign companies account for 57 percent of all exports from this country.
The highest export dynamic in recent years has been demonstrated by the auto industry, which is completely dominated by multinational players. Foreign sales of cars soared by 73.6 percent in the year to Q1. While the spectacular failure to attract the Hyundai investment, which went instead to Slovakia, earlier this year does not portend well for the longer-term future of the industry, the country's largest exporters remain Fiat and Volkswagen (VW), which in 2003 both shipped abroad more than zł.4 billion worth of cars. Both car makers also made significant headway in their foreign sales last year, with Fiat boosting exports by 176.9 percent, while VW more than doubled its foreign sales. Moreover, despite our southern neighbour's strong position as Europe's highest-growth car producer, Poland should enjoy growing car sales, as the industry in western Europe continues to suffer from high labor costs and taxation.
Indeed, while the country's average wage at zł.2,910 (610) remains lower than a fifth of the EU average, productivity is now at nearly 50 percent of the Western European average, thus making the country an attractive location to shift manufacturing operations to. Moreover, productivity gains in the country continue to outpace those in the EU by more than double the rate. Last year, productivity gains amounted to 3.7 percent, against 1.7 percent in the established member states. Although Henryka Bochniarz, president of the Polish Confederation of Private Employers (PKPP), points out that these gains are partly offset by high non-wage costs of labor in this country, she adds that they are also high in many other EU countries, and Germany in particular.
It is in this context that Bochniarz puts German Chancellor's Gerhard Schroeder's remarks that the new EU members "compete unfairly" with the established members through lower corporate tax rates. Speaking at the recent European Economic Forum in Warsaw, Bochniarz called Schroeder's criticism "the highest praise we could have hoped for," and said that the urgency with which some of the richest European countries pursue the issue is testimony to the country's potential as a manufacturing base for Europe.
"It [Chancellor Schroeder's criticism] shows that, despite the excessive bureaucracy, we are seen as well positioned to capture an ever-increasing share of the Western European markets," she said. The recent statistics seem to vindicate this opinion, especially with respect to Germany, the country's largest trading partner. In the first two months of the year, the latest period for which the data are available, the country recorded a current account surplus with its western neighbor to the tune of zł.2.9 billion (610 million). That is more than twice the surplus over the whole of the previous year and INE PAN experts predict that the trend is likely to continue. This is particularly impressive in view of the continued stagnation of the German economy, which accounts for nearly 47 percent of exports and almost a third of imports.
While surplus with the EU's largest economy is unlikely to offset gaping deficits with France, Italy and other countries on a sustainable basis, in January it actually produced a small overall current account surplus of zł.191 million. While this is unsustainable in the longer period, since the country will continue to be in need of a high deficit on the capital account, the narrowing trade gap is good news for the economy, reducing threats to the stability of the currency. Last year alone, the current account deficit nearly halved on the previous year to just 1.7 percent of GDP.
April was the cruellest month for the złoty, as political instability roiled the markets, though that is not necessarily bad news from the exporters' point of view. In fact, the strong euro has been one of the main drivers of export growth, since the common-currency zone accounts for more than 70 percent of all foreign trade.
This month's accession is also expected to contribute to export rises, as administrative costs connected to shipments of goods across borders have been taken down, as well as the last remaining customs duties. Krzysztof Trepczyński, deputy director at the European relations department of the Economy Ministry, estimates that, prior to May 1, the procedural barriers added an average five percent to the costs of an export transaction.
But while these short-term factors have been an important reason for the strong export performance of the economy, experts point out that longer-term, more fundamental factors are also at play. The narrowing of the trade gap with Germany, which indicates that Polish exports have been pushing goods from other countries out of the market, bears testimony to this.
Janusz Kaczurba, an expert at PKPP and former ambassador to the World Trade Organisation, points out that the structure of exports is already modern, as high-processed industrial goods account for three quarters of all shipments abroad. While ten years ago, commodities constituted nearly a fifth of all exports, that proportion is now down to just 4.5 percent, with KGHM, a copper giant, and state-owned coal mines accounting for most of this figure. As much as a quarter of exports is in machinery, while vehicles account for 17.5 percent.
But many observers say that the most promising sector is food exports, which constitutes some six percent of all foreign sales. One businessman says he is surprised that in Germany it is still easier to buy Polish gasoline than Polish jam, in reference to PKN Orlen's high-profile acquisition of a large gas-station network across the western border last year. Robert Maciejko, president of the Boston Consulting Group, says that it is in the area of food that the country has the greatest potential for innovation and creating national brands. While another businessman points out that "a brand name with three Z's in it" can serve as a big turn-off in many countries, there is a novelty value to be exploited in domestic foodstuffs. Now, after trade barriers for farm products have been taken down, is the time to exploit these advantages.
Andrzej Faliński, secretary general of the Polish Organisation of Commerce and Distribution (POHiD), says he expects a surge in exports of local foodstuffs through multinational supermarket chains. He estimates that the growth could be in double digits "from the very beginning."
Renata Juszkiewicz, director of Metro Group, a large German retailer, says the chain co-operates with more than 3,000 suppliers in this country and, at the moment, only about 40 of them export their goods to Metro chains in Germany and other countries. She expects that number to grow in the coming months, as 'made in the EU' Polish brands will inspire more confidence in consumers.
Renata Gejło, spokeswoman for Casino Group, which includes the Geant supermarket chain, says the company does not currently export goods from this country through its network, but she promises a change in that respect.
"We are in the process of negotiations," she says. "We are talking about sales both under private labels and under the suppliers' own brands."
Experts are optimistic about the prospects for continued export growth in the near future, but caution is in order.
"The coming economic boom is of a cyclical nature and will be difficult to sustain, unless efforts for fiscal reform and industry privatization are renewed," warns a recent report by the World Bank. In view of the fact that exports have been so closely correlated with FDI levels, regaining the markets' confidence in political and fiscal stability is essential for a sustained strong performance on that front.
