Poland slow, but sure to be ideal investment target
Heretofore, the government has hardly delivered on its privatization and foreign direct investment (FDI) promises, occasionally to the dismay of the European Commission, but almost always to the detriment of the country. And the Warsaw Stock Exchange (WSE), though it's recorded a stellar year so far, has continually failed to offer a safe haven to consumers' and institutions' capital, because of the few investment options on the bourse, while lax regulations have often made potential issuers and investors think twice before a market debut.
This unfortunate situation has gradually been improving - but EU membership, for all its obvious benefits, certainly won't be a quick fix: the government has tough privatization and legal decisions to make while balancing the budget before economists can expect them to dish off their prized assets. And a larger group of formidable companies needs to head to the WSE, as its regulations begin to align with those of the EU, before foreign and domestic investors properly cozy up to the stock exchange.
"The investment climate is not that great," says Piotr Kwieciński, investment advisor at Citibank Handlowy.
Kwieciński blames the poor investment conditions on a number of factors, including, most recently, the shifts in the highest ranks of the government that has seen Prime Minister Leszek Miller resign effective as of May 2. Uncertainty in the government equals uncertainty among an investor base that didn't put too much trust in the ruling party anyway.
But even with much deadweight in the economy, he adds that it has been able to improve. Economists corroborate their claims for improvement with the fact that some have forecast that the country's GDP will breach the four percent mark this year.
"It has improved, but it's still not very good," adds Kwieciński, referring mainly to the FDI.
Further, he says that since the beginning of this year, the WSE has been impressive. Earlier this year, the WIG20 broke the 1,800 mark - something that has potential issuers clamoring for potential initial public offerings.
"This year has been excellent, but for the volatility," Kwieciński says. "But we can't expect that this will become the most formidable market instantly."
Nevertheless, earlier this year at least 21 companies filed prospectuses with the Securities and Exchange Commission (KPWiG) to float shares on the WSE. Included among them are public and private companies. That's expected to be only the beginning in a rally that's to be spurred in large part by small and medium enterprises, which are expected to be the key drivers in the country's economic growth. The Davidson Institute Emerging Markets Forecast predicts GDP will reach 4.5 percent next year.
The larger equity offerings, such as those deals by PKO and PZU, will steal the headlines, but the aggregate financings and development of small- to medium-sized companies will also be an impetus for growth.
PKO recently selected a privatization advisor and Andrzej Posiadło, president, set a tentative July deadline for filing with the KPWiG.
Mateusz Szczurek, senior economist at ING Bank, takes into account the obvious renaissance of the WSE, but mitigates resulting excitement by noting that the Polish bourse is small fry among Western exchanges. And, he asserts, it would take some time before the WSE would be strong and large enough for the European stage.
"I don't really think the stock exchange will significantly impact the economy for the next two years," Szczurek says. "It's too small." However, he does say that WSE executives have set off on the right track.
"It will be a long process," he says, "because it hasn't got real size. And historically the stock exchange is such a small part of the GDP that it has so little effect."
Recently, WSE professionals have made it public that they intend to link up with foreign stock exchanges, such as Deutsche Bourse and the London Stock Exchange. That would modernize the WSE at the same time as it attempts privatization. It has yet to choose a privatization advisor, but, according to executives, a deal is hopefully in the works, Treasury Ministry willing.
Economists are mostly optimistic about foreign investment resulting from the country's gradual shift from an industrial economy to a services-based one. In recent years, foreign companies have begun to take advantage of the educated multilingual population. Add to that benefits in labor costs, and multinationals have been moving non-core operations to Poland in a process called offshoring. Philips, Siemens, General Electric, IBM and Motorola all have offshore outsourced operations here - and more companies are expected to follow suit.
Szczurek was not very positive in his outlook on overall FDI, but he said offshoring was the exception.
"And this will be easier with the EU in place," he says, adding that Poland would fare better in offshoring than the Czech Republic and Slovakia, for instance, because its wage levels will remain lower longer, and wage rates tend to be a major deciding factor when companies make offshoring decisions.
He explains his idea of Poland's attractiveness. In the recent past, the Czech Republic and Slovakia have stolen much FDI from Poland, such as from Citroen and Toyota, because of their wage levels. But the result is a paradox: the new investment in the two countries has improved their economies, thus driving up wages.
"The whole of the benefits are not obsolete," Szczurek says. "This will make things that much more difficult."
And, he adds, because Poland is a much larger country, new investments will have less effect on the wages, leading him to state, "Poland will enjoy it longer."
This unfortunate situation has gradually been improving - but EU membership, for all its obvious benefits, certainly won't be a quick fix: the government has tough privatization and legal decisions to make while balancing the budget before economists can expect them to dish off their prized assets. And a larger group of formidable companies needs to head to the WSE, as its regulations begin to align with those of the EU, before foreign and domestic investors properly cozy up to the stock exchange.
"The investment climate is not that great," says Piotr Kwieciński, investment advisor at Citibank Handlowy.
Kwieciński blames the poor investment conditions on a number of factors, including, most recently, the shifts in the highest ranks of the government that has seen Prime Minister Leszek Miller resign effective as of May 2. Uncertainty in the government equals uncertainty among an investor base that didn't put too much trust in the ruling party anyway.
But even with much deadweight in the economy, he adds that it has been able to improve. Economists corroborate their claims for improvement with the fact that some have forecast that the country's GDP will breach the four percent mark this year.
"It has improved, but it's still not very good," adds Kwieciński, referring mainly to the FDI.
Further, he says that since the beginning of this year, the WSE has been impressive. Earlier this year, the WIG20 broke the 1,800 mark - something that has potential issuers clamoring for potential initial public offerings.
"This year has been excellent, but for the volatility," Kwieciński says. "But we can't expect that this will become the most formidable market instantly."
Nevertheless, earlier this year at least 21 companies filed prospectuses with the Securities and Exchange Commission (KPWiG) to float shares on the WSE. Included among them are public and private companies. That's expected to be only the beginning in a rally that's to be spurred in large part by small and medium enterprises, which are expected to be the key drivers in the country's economic growth. The Davidson Institute Emerging Markets Forecast predicts GDP will reach 4.5 percent next year.
The larger equity offerings, such as those deals by PKO and PZU, will steal the headlines, but the aggregate financings and development of small- to medium-sized companies will also be an impetus for growth.
PKO recently selected a privatization advisor and Andrzej Posiadło, president, set a tentative July deadline for filing with the KPWiG.
Mateusz Szczurek, senior economist at ING Bank, takes into account the obvious renaissance of the WSE, but mitigates resulting excitement by noting that the Polish bourse is small fry among Western exchanges. And, he asserts, it would take some time before the WSE would be strong and large enough for the European stage.
"I don't really think the stock exchange will significantly impact the economy for the next two years," Szczurek says. "It's too small." However, he does say that WSE executives have set off on the right track.
"It will be a long process," he says, "because it hasn't got real size. And historically the stock exchange is such a small part of the GDP that it has so little effect."
Recently, WSE professionals have made it public that they intend to link up with foreign stock exchanges, such as Deutsche Bourse and the London Stock Exchange. That would modernize the WSE at the same time as it attempts privatization. It has yet to choose a privatization advisor, but, according to executives, a deal is hopefully in the works, Treasury Ministry willing.
Economists are mostly optimistic about foreign investment resulting from the country's gradual shift from an industrial economy to a services-based one. In recent years, foreign companies have begun to take advantage of the educated multilingual population. Add to that benefits in labor costs, and multinationals have been moving non-core operations to Poland in a process called offshoring. Philips, Siemens, General Electric, IBM and Motorola all have offshore outsourced operations here - and more companies are expected to follow suit.
Szczurek was not very positive in his outlook on overall FDI, but he said offshoring was the exception.
"And this will be easier with the EU in place," he says, adding that Poland would fare better in offshoring than the Czech Republic and Slovakia, for instance, because its wage levels will remain lower longer, and wage rates tend to be a major deciding factor when companies make offshoring decisions.
He explains his idea of Poland's attractiveness. In the recent past, the Czech Republic and Slovakia have stolen much FDI from Poland, such as from Citroen and Toyota, because of their wage levels. But the result is a paradox: the new investment in the two countries has improved their economies, thus driving up wages.
"The whole of the benefits are not obsolete," Szczurek says. "This will make things that much more difficult."
And, he adds, because Poland is a much larger country, new investments will have less effect on the wages, leading him to state, "Poland will enjoy it longer."
