Episode 1: Poland: A post-Soviet success story

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Since the fall of communism, Poland has seen major economic success. But how do institutional investors view the country today? This episode explores Poland’s economic history, current economy and considerations for Canadian pension plans looking to potentially invest there. We’re joined by Marcin Piatkowski, senior economist at the World Bank Group, Rachel van Elkan the International Monetary Fund’s Mission Chief to Poland and Switzerland, Rebecca McVittie, the investment director responsible for Fidelity’s emerging market equity disciplines and Julian Mayo senior vice-president and chief investment strategist at Fiera.

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(Run time: 27:42 min, size: 25.3 MB)

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Speakers

Julian Mayo

Julian Mayo

Senior vice-president and chief investment strategist, Fiera Capital

Julian Mayo joined the firm in 2003 as a director of Charlemagne Capital (UK) Limited (now Fiera Capital (UK) Limited) and a member of the portfolio management team. Mayo began his investment management career in Hong Kong with Schroders before joining Thornton Management (now Allianz Global Investors Asia Pacific) in Hong Kong in 1985. He opened Thornton’s Tokyo office in 1987, where he was responsible for North Asian investments, before moving to London in 1991. After 11 years at Thornton, Mayo joined the Regent Pacific Group and returned to Asia in 1999 as managing director of Regent’s Hong Kong office responsible for portfolio management. Mayo holds a BSc in Economics from Bristol University.

Rebecca McVittie

Rebecca McVittie

Investment director, Fidelity International

Rebecca McVittie, investment director, is responsible for FIL’s Emerging Market Equity disciplines. McVittie re-joined Fidelity in September 2013 from Newedge UK Financial Limited, where she was head of the prime brokerage European capital introductions team. In this capacity she maintained responsibility for relationships with key manager clients and institutional hedge fund allocators, whilst managing a team covering the broader European hedge fund investor universe. Prior to this McVittie was a member of Fidelity’s Europe, the Middle East and Africa institutional group from 2003 to 2007. McVittie has also held roles at ISIS Asset Management and Henderson Global Investors. McVittie holds a BA in Classical Civilisation from Kings College, University of London, and a UK Investment Management Certificate.

Marcin Piatkowski

Marcin Piatkowski

Senior economist, World Bank

Professor Marcin Piatkowski is a senior economist at the World Bank, now based in Beijing, where he works with the governments of China and Mongolia to improve the business environment, promote innovation, and support green development. He is also associate professor at Kozminski University in Warsaw, the highest ranked business school in Central and Eastern Europe. Previously, he was a visiting scholar at Harvard University’s Center for European Studies, chief economist and managing director of PKO BP, the largest bank in Poland, economist in the European Department of the IMF and advisor to IMF’s executive director. He also served as advisor to Poland’s deputy premier and minister of finance. He holds a Ph.D. and habilitation in Economics from Kozminski University and an M.A. in Finance and Banking summa cum laude from the Warsaw School of Economics. He was a visiting scholar at Harvard University, London Business School and the OECD Development Center. He is the author of Europe’s Growth Champion: Insights from the Economic Rise of Poland, Oxford University Press 2018, which has been selected as one of “Best New Economic Development Books to Read in 2019.”

Rachel van Elkan

Rachel van Elkan

Mission chief for Poland and Switzerland, International Monetary Fund

Rachel van Elkan, mission chief for Poland and Switzerland, International Monetary Fund
Rachel van Elkan is currently mission chief for Poland and Switzerland in the European department of the International Monetary Fund. A national of Australia, with a Ph.D. in economics from the University of Chicago, her previous positions at the IMF include mission chief for Cyprus, Latvia, Philippines, Singapore and Turkey and head of regional studies for Asia and the Pacific. Her research interests encompass growth theory, trade and exchange rate effects of global value chains, credit cycles, the transfer problem, structural determinants of inflation, and monetary policy frameworks. She is married with two sons.

Text transcript

[Yaelle]: Hello, my name is Yaelle Gang and I’m the editor of Canadian Investment Review.

[Martha]: And, I’m Martha Porado, associate editor of Canadian Investment Review and Benefits Canada.

[Yaelle]: Thank you for joining us for Pension Passport, where we’ll connect with investment experts from around to world to zero in on different countries and explore their economies, investment opportunities and risks for pension plans.

[Martha]: In this episode, we’ll take a trip to Poland. We’ll be joined by professor Marcin Piatkowski who is a senior economist at the World Bank, Rachel van Elkan the International Monetary Fund’s Mission Chief to Poland and Switzerland and Rebecca McVittie, the investment director responsible for Fidelity’s emerging market equity disciplines, as well as Julian Mayo, who is a senior vice-president and chief investment strategist at Fiera.

[Yaelle]: Since Poland emerged from Soviet rule and started liberalizing its economy, its seen major improvements. For example, since 1989, it’s increased its GDP per capita by almost 150 per cent.

In 2017, FTSE Russell upgraded Poland from emerging market status to developed market status, making it the first post-communist country to be added to the list. MSCI, on the other hand, still considers Poland an emerging market.

[Martha]: To speak about Poland’s economic history please join me in welcoming Professor Marcin Piatkowski, who is a Senior Economist at the World Bank, now based in Beijing, where he works with the governments of China and Mongolia to improve the business environment, promote innovation, and support green development. He is also an associate professor at Kozminski University in Warsaw. Previously, he was a visiting scholar at Harvard University’s Center for European Studies, Chief Economist and Managing Director of PKO BP, the largest bank in Poland, economist in the European Department of the IMF and Advisor to the IMF’s Executive Director. He also served as Advisor to Poland’s Deputy Premier and Minister of Finance.

Professor Piatkowski has written a book called Europe’s Growth Champion: Insights from the Economic Rise of Poland and we want to focus in on Poland’s interesting economic history. Thank you for joining us.

[Marcin]: Thank you for having me.

[Yaelle]: Thank you. So let’s start out, can you please tell us how Poland was able to grow so significantly after the fall of the iron curtain. What market reforms took place that set the stage for such a turnaround?

[Marcin]: That’s a great question. Let me start by saying that for more than 1,000 years of its history, Poland and the rest of eastern Europe was actually a perennial economic underachiever that was stranded on the periphery of the Europe and global economy and it has lasted all the way until 1989 at the fall of communism and following that during the next 30 years Poland has become the most successful economy in Europe and among the most successful economies in the world. Now what made it happen? It’s a very . . . the key question that I elaborate on in my book. But in terms of the market reform there were plenty of those that happened just when communism collapsed, and Poland spearheaded the collapse of communism.

So 1989, Poland was the most radical reformist in the former post-Soviet camp and it introduced what we call a shock therapy which included a rapid liberalization of international trade, so in January 1st 1990 suddenly everyone could trade, export and import whatever they liked. It also involved elimination of market monopolies, freeing of prices, unification of the foreign exchange rate, which eliminated the black market for foreign currency. So there’s a lot of these macroeconomic reforms early on, but then it was followed by fast institution building, which was modelled on the West – on the best practices from the Western Europe and North America. It also helped that Poland did get a significant debt restructuring. Half of its foreign debt was cut by the Paris Club and the London Club of creditors and that helped a lot. And what also mattered was the boom in education. I mean there was less than 10 per cent of Poles that studied before 1989 and that quickly increased to about 60 per cent of Poles in 2000. So, there was a huge increase in the quality of capital. And last but not least, Poland was one of the few, if not the only, post-communist country that had a very transparent privatization process that did not produce any oligarchs. And the reason it happened so is that Poland was a bit lucky with delaying the mass privatization. It only happened in 1996 where everyone already knew what the market prices for assets were, so it eliminated asset stripping and it made it for Poland to be one of the cleanest and least corrupt countries in the post-Soviet camp now.

[Martha]: So you’ve written that Poland is Europe’s true growth champion and now it has entered its golden age. So what’s behind that characterization?

[Marcin]: Just the data. If you look at the data, it shows that over the last 30 years, Poland’s GDP per capita adjusted for prices, or PPP, tripled from about $10,090 in 1990 to $30,000 this year. And that compares to say Hungary, a peer country in the region, whose income per capita did not even double, or to Canada where your own income for an average Canadian increased by less than half. So for Canada it’s less than 50 per cent, for Poland it’s triple. And that made Poland by far the most successful economy in Europe for the past 30 years and this is why I called my recent book Europe’s Growth Champion.

But Poland was a stellar performer, not only in Europe. Over the last 25 years it was also the fastest economy worldwide in terms of growth compared to all its middle income and high- income peers. So Poland actually grew faster than South Korea, than Singapore, Taiwan, all the other Asian Tigers, and pretty much every single other large economy that we usually look at and that’s perhaps the reason why Poland became the first post-communist country last year to join the FTSE Russell list of developed countries and its quite well deserved because the income of Poland right now is higher than $30,000.

[Martha]: Thank you for joining us professor Piatkowski and providing that insight on Poland’s economic past.

[Yaelle]: Yes, thanks so much. And Martha, did you know I actually did a road trip of Poland a few years ago.

[Martha]: Really, do you have any recommendations?

[Yaelle]: Yes, so I really loved all of it, but a highlight for me was Gdansk, which is a Northern Port city on the Baltic Sea. If you like history you will like Gdansk. It’s actually where Germany first attacked Poland during WW2 and it’s where the shipyard rebellions that led to the first free elections in any Soviet country happened. So it’s a must-visit if you like history and it’s also just really beautiful.

[Martha]: As an unapologetic history nerd, I am super jealous.

[Yaelle]: Yeah, you should go there. Anyways, now, to speak broadly about Poland’s economy and outlook, please join me in welcoming Rachel Van Elkan the International Monetary Fund’s mission chief to Poland and Switzerland, who joins us on the phone from Washington. Hello Rachel.

[Rachel]: Hi Yaelle, how are you?

[Yaelle]: Good thanks. So I wanted to get started. If you please tell us what’s currently driving Poland’s growth?

[Rachel]: So, in 2017 through late 2018, Poland benefitted from three coincident cycles: strong euro area growth, inflows of EU funds and new social benefits programs. This boosted consumption, investment and exports. As a result, growth accelerated from around three per cent in 2016, to around five per cent last year. Moderating world trade since mid of 2018, forced Polish growth to slow towards the end of last year, but the economy has remained surprisingly resilient. In Q1 of this year, growth was 4.7 per cent underpinned by very strong investments. Exports too have held up relatively well on reorientation to faster growing countries.

[Martha]: So what are some of the big political and economic challenges or risks that Poland is facing today?

[Rachel]: So first let me highlight some notable successes. Poland has seen one of the longest stretches of continuous positive growth in the world at more than 25 years. As a result, poverty, unemployment and income inequality have all declined sharply. Also, fiscal and external imbalances have declined, which helped shore Poland’s financial markets from regional and global turbulence.

In terms of challenges, let me mention two.

Poland is at an advanced state of demographic transition- the working age population is already shrinking and forecast to decline by about one percentage point per year through the middle of the century. This will intensify the shift from excessive labour to labour scarcity. Large inflows of foreign workers in recent years, which account now for more than five per cent of employment have helped somewhat, but other countries in the region including those with higher wages than Poland also face labour shortages and are competing for foreign workers.

Second, it’s also critical that Poland maintain prudent policies and sound principles of economic governance. Recent policy initiatives, including the further large increase in social benefits, freezing electricity prices and changing the governance of financial supervision signal a greater role of the state in the economy. Also relying on repeated policy stimulus to prop up growth will lose effectiveness overtime while also increasing macro-economic imbalances.

[Yaelle]: Thank you. So with these challenges, but also growth in mind, what’s your current outlook for the Polish economy and why?

[Rachel]: So the Polish economy is highly integrated with Europe and the world beyond and trade is an important growth driver through participation in global value chain. International trade tensions have already dampened Polish growth. The slowdown in Europe will also generate spillovers to Poland. However, we’re expecting growth to reach a still-strong four per cent this year with inflation picking up as labour shortages bind.

Part of this growth reflects the effect of the new fiscal packages. If it were to stoke inflation, monetary policy would need to be tightened. Over the longer-term, sustaining income convergence with the shrinking working age population will require moving away from labour-intensive production. This will require removing barriers to investment by preserving a level playing field for all investors, particularly when the state has a large footprint in the economy and also increasing the predictability of policy changes through greater consultation with the business community. Also, it will require more reliable access to skilled labour by upskilling the Polish population and adopting a foreign worker policy that accepts workers from a wider set of countries and allows them to stay for longer durations.

[Yaelle]: Great, thank you so much for joining us Rachel. Before we move onto our next guest I have a jeopardy-style quiz for you Martha.

[Martha]: Alright.

[Yaelle]: Okay, first clue. I am a famous astronomer.

[Martha]: Nicolas Copernicus.

[Yaelle]: Who is Nicolas Copernicus?

[Martha]: Who is Nicolas Copernicus (laughs).

[Yaelle]: Okay second. I am a woman. And I also happen to be the first woman to win a Nobel Peace Prize.

[Martha]: Marie Curie.

[Yaelle]: Who is Marie Curie?

[Martha]: Who is Marie Curie? Thanks Alex. Sorry.

[Yaelle]: And finally, I am a pope.

[Martha]: Well, ah I think I think I’m going to have to go with Pope John Paul the 2nd and I attribute my amazing knowledge of famous Polish people to my extremely Polish grandfather.

[Yaelle]: Correct, although who is John Paul 2 would have been the correct answer. Zero. But very impressive Polish knowledge.

[Martha]: No Chopin? Oh well.

[Yaelle]: Next time.

[Martha]: And now, to talk about the specifics of what investing in Poland means for institutional investors, we’ll be joined by Rebecca McVittie, the investment director responsible for Fidelity’s emerging market equity disciplines.

Rebecca rejoined Fidelity in 2013 from New Edge UK Financial Limited where she was the head of the Prime Brokerage European Capital Introductions Team. Prior to this, Rebecca was a member of Fidelity’s EMEA Institutional group from 2003 to 2007.

Hi Rebecca. Thanks for joining us. Where are you calling in from today?

[Rebecca]: It’s my pleasure to be here, I’m calling in from London.

[Yaelle]: Wonderful, thank you so much. To get us started, are there specific sectors that are more attractive than others in Poland right now?

[Rebecca]: For us, Poland in many respects has been a little bit disappointing and we’ll come on to talk about that a bit further. When I do look at the opportunity set for an equity investor there are a couple of areas I’d flag which are quite interesting.

One of them is the video gaming sector. So video gaming in many respects is an area which we associate with countries like China where development has been very prolific. In the case of Poland, one of the things that the gaming industry benefits from is a number of developers who are very well educated. So education levels are particularly high, but the labour force is not expensive. So companies are able to access cheaper labour than in many other parts of the world with very high education standards.

If I look more broadly and think about some of the other areas where opportunity can present, interestingly sometimes it’s not through Polish companies per se that we find opportunities. It can be that we identify businesses, which are more geographically diverse, perhaps companies listed in other markets that have interest in Poland and this can sometimes be the case in areas like food retail or online retail where classified businesses may have emerged within Poland.

If I think finally about one other area that’s associated with consumption there have been opportunities for us in areas like the airline sector where were find companies, which again aren’t listed in Poland, but fly through Poland as one of their routes and again benefit from that sort of lower cost labour force that exists in the Central Easter Europe.

[Martha]: And so for those investing in equities, what’s liquidity like?

[Rebecca]: So liquidity on the face of it is quite good. It’s quite a large and liquid market. However, in our experience we obviously have traders which operate across many different markets and there have been some times where volumes have actually been quite thin. That’s been particularly the case if we look across Europe very broadly including central Eastern Europe through 2019. If we look at those sectors which are most traded it tends to be the larger sectors in Poland, say banks for example, and refiners which are quite prevalent within this market.

A couple of other things that I would observe is that the market [has] really benefited from passive flow from international investors. So Poland is an index constituent, so any investors who are using any form of ETF type product, some form of passive vehicle, would have flow heading into the market. And certainly one of the things we’ve seen over the course of time is that market share is moving in favour of international investors versus more local investors.

[Yaelle]: Thanks. And when you started off, it sounded like you were only seeing limited opportunities in Poland. So why do you think that is?

[Rebecca]: I think one of the challenges for us when you introduced me you obviously explained I’m a member of an emerging markets team. If we think of this particular country in the context of emerging markets, in many respects it’s what I would describe as more developed-market esque as an economy. In that regard, some of the areas where we typically find opportunities are much more saturated.

If I give you some examples of that, financials is the largest sector. So if you look to an index like MSCI Poland, you’d see that financials represents about 48 per cent of that index, so it gives you a sense of the magnitude. One of the challenges is despite the fact that Polish macro is actually quite supportive and attractive, which would usually lend itself to an area like the banking sector, we’ve had some issues because one of the things that the government has done in the last couple of years is they’ve introduced levies on banks for example and those levies have implications for the level of profitability.

We also find that there’s a relatively stringent financial regulator. And so if you look at policy on dividend payments there’s actually a limit as to how much these banks can pay out. That’s how I’d really summarize fits alongside valuation, which are quite rich particularly relative to some of the neighbouring countries and returns that are not that compelling for us as investors.

If you think about that more saturated profile that I’ve described in the banking sector, it’s also the same in consumer. So when you think about consumption actually the Polish consumer has been relatively strong. It’s an area where we see a good degree of optimism. Unemployment is low. The other thing that we have the benefit of in Poland is that the government has been increasing handouts to pensioners and families so that manifests in increase in things like child allowance. You would hope that that would filter through to the underlying economy. I think one of the challenges for us though as stock pickers is if you look at areas like e-commerce or food retail, they’re actually really well penetrated. In the case of food retail, it tends to be more discounters who have very strong market share. And what we don’t see is a lot of opportunity to grow, so competition appears to be increasing still.

So for us as stock pickers, not particularly attractive that specific backdrop.

[Martha]: So we’ve talked about quite a few challenges. So let’s zero in on any risks that we haven’t raised yet and what are some ways to mitigate those?

[Rebecca]: Yeah, so when I think about risk I’m going to think more here about what we do as stock pickers, so as stock pickers we’re deploying capital on behalf of investors and we need to make prudent conservative decisions. We want to avoid permanent loss of capital. So when we do invest in stocks one of the things that we think about is how we can mitigate risk. Generally, we’ll look for companies that have certain characteristics. So that could be particularly strong corporate governance, very robust management teams, the kind of management teams who will make very sensible capital allocation decisions. If they are allocating capital we want that growth to be self-funded, so to come from free cash flow rather than using leverage. So we’ll tend to think about the risks that can present if a company has too much leverage. That’s the type of area we feel that as investors you can avoid.

We’ll also think about the treatment we that receive as minority shareholders. So one of the risks when you invest in emerging markets broadly speaking is that you can be investing for example in companies that have a very significant relationship to the state, so state-owned enterprises. Sometimes these particular businesses aren’t run with us as minorities in mind. They’re really tools of the state. And as a result of that, some of the decisions that can be made are often in the interests of the government rather than us as minority shareholders.

So those are some of the ways as you look at stocks we feel we can eliminate some of the risks associated with investing.

[Yaelle]: So, overall with those risks in mind, but also some of the opportunities you mentioned, what advice would you have for plans thinking about investing in Poland?

[Rebecca]: I think the primary area that I would focus on is thinking about diversification. So we are on a team that can invest in roughly 25 markets. And whether it was Poland, Brazil, Russia, there are many, many emerging markets to pick from one of the things we’d always, always caution about is choosing a single market to invest in at a given point in time.

I’ve talked about some of the challenges just finding actual opportunities on the ground- some of the concerns we have around valuations being quite rich. I think the best guidance I would give is Poland can form a part of a diversified portfolio, but thinking about that country on a standalone basis is an approach that we would perceive as far more risky and far more limited.

So if you’re looking to minimize risks and also optimize or increase the chances of return really think about investing in a more diversified manner, whereas if there’s good opportunity you can capture Poland within that particular portfolio.

[Yaelle]: Wonderful, thank you so much Rebecca for joining us and sharing your thoughts on Poland.

We’d now like to welcome another guest who can share his perspective on what investing in Poland means for Canadian pension plans. Please join me in welcoming Julian Mayo who is a senior vice-president and chief investment strategist at Fiera. Welcome Julian.

[Julian]: Hi.

[Yaelle]: Where are you calling in from today?

[Julian]: I’m in London today actually.

[Yaelle]: Well great, thanks so much for joining us.

So given your bottom-up approach to equity selection what opportunities are most interesting in Poland right now?

[Julian]: Well from an equity perspective, Poland is a somewhat frustrating place to invest in because the macro looks very attractive. You’ve got strong GDP growth, five per cent plus last year, around four per cent possibly this year. Inflation is under control at around two per cent. You have a current account deficit, but it’s only one per cent so of GDP. Government balance is strong, government debt GDP is less than 50 per cent. And yet, the structure of the stock market I would say, unusual even in emerging markets context, makes it a little bit less attractive because you’ve got a significant proportion of the market, which is accounted for by state-owned businesses and which account for well over three quarters of the market, which actually is even more than in China. So for us the attractive opportunities really are the banks and some of the selected consumer names, which obviously are taking advantage of the fact that it’s a strong top-down consumer story.

[Martha]: So some have raised serious ESG concerns with regard to Poland, can you shed some light on that?

[Julian]: Yes, this is partly connected with the composition of the stock market. The Polish stock market is largely made up of state-owned businesses. In fact over three quarters of the stock market is made up of SOEs, which actually is a higher proportion even than China. These are banks some of them are in the oil and gas sector, in materials sector and utilities and so this raises really one significant concern at the governance level, the boards tend to be elected by the government and they tend to be acting often in the interests really of the government and of broader government-linked if you like social measures rather than necessarily acting on behalf of all shareholders including foreign minority shareholders such as ourselves.

The second ESG concern, which is again related to that, is the fact that you have in particular two very large material stocks which are significant parts of the Polish stock markets- one is the copper business- a relatively high-cost inefficient copper business and the other is a coal business and so of course from an ESG perspective, one is trying to discourage the use of commodities, in particular, the use of coal and so from both a governance perspective and also from an environmental perspective there are concerns with investing in Poland.

[Yaelle]: So ESG considerations aside, what other risks is it important for institutional investors to be aware of when considering Poland?

[Julian]: Well from a macro-perspective things are ticking along very well as I mentioned and I would suggest, although I’m not a fixed income investment specialist, so I would suggest that Poland is probably a better play from a fixed income perspective given the composition of the market and given the lack of relatively attractive investment opportunities within the equity market.

Clearly the biggest risk is a macro slow down. That was I think it was certainly considered until relatively recently that the next move in interest rates would be up, however, the statements recently by the European Central Bank governor Mr. Draghi suggests that the Draghi Put is alive and kicking and that the likelihood is that monetary policy in Western Europe will remain easier for longer and that therefore in turn means that there is a much less likelihood then was the case until recently that interest rates in Poland would be put up. So I think the risks of a kind of overheating economy is relatively small. The risk of conversing of a significant slowdown, I think is also relatively small.

I guess one of the other concerns we have is the ongoing brain drain. Some of the brightest people in Poland have left the country over the last several years and that is continuing as the Western European economies take some of those people, but overall I would say that the main risks of investing in Poland really are ones of governance rather than any macroeconomic concerns.

[Yaelle]: Thank you Julian. That’s all the time we’ve got.

Before we sign off, here’s a spotlight on a Canadian plan’s investment in Poland. In 2019, the CPPIB originated a €250 million mezzanine loan investment in Echo Polska Properties N.V., the owner of the largest retail property portfolio in Poland.

[Martha]: Thank you for tuning into Pension Passport, where we explored pension investing in Poland.

[Yaelle]: Don’t forget to tune into our next episode, which is available on www.investmentreview.com/podcasts.

[Martha]: See you next time, or as they say in Polish, do widzenia!

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