Poland has changed drastically in the past few decades, and that transformation is ongoing still. Sofia Lotto Persio reports from Warsaw on the changes affecting banks and exporters.
Poland’s growth has outpaced every other country in Europe. Following its accession to the European Union (EU) in 2004, the country has clearly been able to utilise the opportunities and investments offered by the inclusion in the single market. Even in the post-crisis years, while the EU was struggling, Poland kept growing.
Despite the size of the domestic market – Poland is the sixth most populated country in the EU – the export sector has also been growing steadily, from 40% of GDP to 47.4% in the past five years, according to World Bank data.
While this sounds like a comfortable position to be in – certainly more comfortable than that of major European economies, the country has yet to reach its full potential. A McKinsey report published in January 2015, Poland 2025, predicts that Poland could become a major engine for growth on the continent if it decided to pursue an aggressive growth policy in the next decade, “reaching levels of countries such as Spain, Slovenia, or even Italy in terms of GDP per capita in purchasing power parity”.
New government, new rules
But so much can change in a decade, and Poland’s seemingly seamless growth path is already facing a new challenge. Last October, the country’s elections saw the rise to power of the Law and Justice party (PiS in Polish). Eurosceptical, nationalistic and socially conservative, the party is the first to govern Poland with an absolute majority since the fall of the communist regime in 1989. Such an unprecedented power position allows the new government to act swiftly on fulfilling electoral promises. Within three months, the government had enacted constitutional changes affecting the judiciary, reforms of the public media and of police powers, and, on the financial side, imposed new taxes for banks and big retail stores, mainly to support increased social spending.
Since the beginning of February, each bank in Poland with more than Zl4bn (approximately €1bn) in assets is required to pay a yearly 0.44% tax levy. The tax, which excludes government securities, is expected to reap Zl4-5bn (€0.9-1.1bn) from the banks’ net profits. Considering that in 2015 Polish banks’ net profits were Zl11.5bn (€2.6bn), the tax would cut profits by around 45%. The law also forbids banks from increasing the cost of their products, from mortgages to corporate loans, to transfer the tax’s cost onto their clients.
Some estimates, such as Moody’s, predict that some banks will report a loss as a consequence of the tax. Yet, it should not constitute a risk for the country’s financial sector stability, since the banking sector as a whole has posted solid results. According to Marcin Kujawski, economist at BGZ BNP Paribas, the government would not want to compromise the contribution that banking has made to the Polish economy. “Lawmakers seem to be aware that they cannot hurt banks too much, as it would be reflected in GDP growth,” he tells GTR.
Nevertheless, the government’s changes have attracted attention from abroad. In January, ratings agency Standard and Poor’s downgraded the country’s credit rating from A- to BBB+, with a negative outlook. “The downgrade reflects our view that Poland’s system of institutional checks and balances has been eroded significantly,” explained S&P in a statement announcing the downgrade. “It came as a surprise,” says Martin Reichel, member of the management board at HSBC Bank Polska. “Has it changed the overall sentiment? Not really.” According to Reichel, investors could take these changes into account but are unlikely to change their general approach to a country whose growth is outpacing all countries in continental Europe.
“We are a stable country with a stable political situation, we cannot be treated as an uncertain partner,” says Michal Wosik, investment director, export finance section at state-owned development bank BGK. Other ratings agencies seem to agree with Wosik, and have confirmed their ratings, with an A- from Fitch with a stable outlook, and, one notch above, an A2 from Moody’s, also with a stable outlook.
Increasing export support
In comparison, the new government’s approach to export support is rather less controversial. The minister for development, Mateusz Morawiecki, a former banker, announced in December the government’s intention to focus on the export sector as an engine of growth and to reform the current structure of government export support.
During a trip to Warsaw, this GTR reporter was told mostly vague news about the plans from a range of sources. The banks would certainly like to see more co-ordination between government institutions. This seems to be the government’s idea too, to centralise export support currently provided by different agencies and institutions. According to Kuke, the Polish export credit agency, one of the issues the reform will address is which ministry is responsible for the support, as it currently involves both the ministry of development and the treasury.
BGK controls a stake in Kuke. The bank acts both as the means through which the treasury settles its activities, but also, ever since its restructuring two years ago, as a more commercially-driven bank involved in supporting exports, particularly through the provision of all types of LC guarantees, bond underwriting and project and long-term financing. There, the expectation is that, whether the merging of institutions occurs or not, the bank should retain a central role in supporting exports. “The whole financing of the exports will most probably be run through BGK, or else another kind of bank, like an export-import bank, would have to be created to do so,” says Wosik.
As GTR goes to press, the expectation is that the government will announce its plans by the beginning of March, and that the new structure will become official by 2017. It is supposed to have a bigger budget of at least Zl250mn (€57.3mn). “Since the current agencies quite often compete with each other, we can expect the new agency to have more powers and decision-making abilities in order to co-ordinate the actions necessary to promote Polish goods and services abroad,” says Jacek Mocko, trade finance manager at BGZ BNP Paribas. “However, the final set-up is currently unknown.”
One thing that the banks enjoy in the current export support system is Kuke’s ability to cover up to 100% of the transaction with no country limit, instead evaluating transactions on a case-by-case basis. Both Kuke and BGK are also very supportive when it comes to exporting to more challenging markets such as Ukraine or Belarus.
BGK tells GTR that the problem, when it comes to Belarus for example, is finding commercial partners willing to do the transaction. “We have a very good project in Belarus, but no other Polish bank is willing to enter the club deal with us, not even for the smaller portion of the financing, so probably at the end of the day we will have to do it bilaterally,” says Wosik. While he understands the regulatory pressures on commercial banks, he believes Belarus is an important commercial partner for Poland, being its nearest neighbour. “In terms of risk appetite we are quite a unique institution, but this is also our role. The governmental programme is not there to push commercial banks out of the market, but to enable Polish companies to find support because commercial institutions in Poland have not provided that support for high-risk countries,” he explains.
Export finance is a new area for many Polish banks. The foreign banks historically handled these transaction through their headquarters, whereas local banks focused on providing more short-term solutions.
Banks are now adapting to a growing demand for export support. “There is this kind of niche in the Polish market,” explains Grzegorz Pojnar, trade finance manager at ING Bank Slaski. Providing export finance can increase a bank’s competitive edge in a busy marketplace.
In fact, the country’s banking sector is still incredibly competitive, with rates of consolidation slower than in neighbouring countries. This may also change in the next 10 years, as a recent merger between BGZ, a Polish bank founded in 1975, and BNP Paribas indicates. The move brought mutual benefits in the trade finance space as BGZ brought in customers, particularly from the agribusiness sector, who wanted to expand internationally, and BNP Paribas could provide the international network to do so.
An international bank network is increasingly in demand, as Polish exporters have been pushed to look for new markets following the sanctions between Russia and the EU.
Poland and Russia’s commercial relationship have suffered as a result of the sanctions, and an overall decrease in transactions can be observed across all export sectors. The Polish apple production was particularly impacted, but, as GTR was told repeatedly, as an example of Polish adaptability, the country now has burgeoning cider production.
Those who kept exporting have also proved their flexibility. In fact, exports grew again last year, both because of growth in the eurozone and the EU (the recipients of respectively 60% and 80% of exports) and success in developing new markets such as the Middle East, North Africa and Asia.
“There was concern over what was going to happen with Russia, but after several months it turned out the situation was even better, because exporters were so focused on Russia that they weren’t searching for new opportunities, which at the end of the day proved to be better than Russia,” says Wosik.
This sort of blessing in disguise required a certain cultural change in the way trade finance was conducted. In fact, most transactions to Russia used to be straightforward open account, but in other markets different rules apply. “This provides an opportunity to grow the trade finance business, because documentary products such as letters of credit are used commonly
to secure and settle transactions,” says BNP’s Mocko.
The demand for support in markets like Ukraine and Russia has not completely withered, either. “We continue to receive inquiries from companies regarding transactions in Russia. However, taking into account international sanctions, our possibilities to take part in such transactions are currently limited,” adds Mocko.
HSBC’s Reichel tells GTR the bank is still looking into Ukraine. “Ukraine is close to the Polish border and it is easier to handle. It is also more similar to Poland from a cultural perspective,” he says.
HSBC has also been able to leverage its presence in East Asia, where Polish exporters find particularly interesting markets both for their size and their growth potential. India, Vietnam, and of course, China, are all top destinations. ING has instead seen growing interest from Polish exporters looking into Latin America, particularly in Mexico, Bolivia and Brazil.
Sub-Saharan Africa remains a more unexplored territory, mostly due to the lack of historical contacts between Poland and the region. BGK is keen to support exporters in that market. “In a month there will be a delegation to Senegal and Côte d’Ivoire. A Polish chemical company is assessing a project in Senegal and already has some assets there. We are very interested in the project, so this will be our first big project in Africa, but for now it is still terra incognita,” says Wosik.
But the big new frontier for Polish exporters will be Iran, with banks reporting high interest for support in that country. At the moment banks are still unable to provide support for trade with Iran, but the feeling in the country is that Poland is ready to bite into this opportunity.
Poland’s expansion is also taking on the digital frontier. Minister of development Mateusz Morawiecki has highlighted the need for the export sector to be more diversified and geared towards technology and innovation. He announced in February that an investment of Zl1tn (€230bn) will be planned over the next 25 years to support growth in those sectors. “We want to be right in the eye of the storm of digital revolution,” Morawiecki said while presenting the country’s economic roadmap.
The structure of Polish exports is still very labour-intensive and reliant on the country’s low labour costs, but it is only a matter of time before Poland’s cheap labour is outpriced, so exports need to find a way to increase their value. The plan is to boost research and development expenditure, currently at 0.8% of GDP, and create a private equity fund to which state-owned companies will contribute, getting start-ups involved to find innovative solutions to the problems they face. “Even within the region we are behind, something reflected in the low share of high-tech exports, which is 8%, compared to the Czech Republic where it is about 15%,” says BNP Paribas economist Marcin Kujawski.
Banks are also adapting to digital innovations. ING launched Aleo, a one-stop-shop kind of platform for supply chain management that any company, ING customers or not, can register to use. “Suppliers’ financing, one of the core products on Aleo, is particularly well recognised. It allows not only to optimise working capital both from buyers and suppliers’ perspective, but also to earn on customers’ liabilities. We are very happy to see the dynamic growth of new customers interested in our solution. Clients like to have everything in one place,” says Jakub Wrede, ING trade finance director.
The letter of credit business has also gone digital. As BNP’s Jacek Mocko explains: “An electronic platform for handling trade-related transactions, such as letters of credit and bank guarantees, is a necessity. As the number of transactions increases, customers don’t want to send issuance orders in paper form. Without such a platform it is rather difficult to acquire new customers.”