Flaws and Justice

Poland's tilt to nationalism is bad for investment

Poland's lurch to statism could backfire. The country's centre-right, eurosceptic Law and Justice (PiS) party may have won an outright majority in the national election on October 25, exit polls suggested on the same day. Though PiS was expected to triumph, earlier polls had it needing to forge a coalition to govern. Now it could be free to press ahead with a dirigiste set of policies that threaten Poland's free-market success.

It may seem perverse that Poles would unseat the incumbent Civic Platform (PO) party after eight years of rule in which gross domestic product increased by an average of almost four per cent per annum. Yet it wasn't unalloyed sweetness. Recordings of politicians published during its rule hinted at interference in government on the part of the supposedly independent central bank. And the government sucked liquidity from the stock market last year by automatically converting some pension investments from equities to bonds, a move designed to primp the country's external finances.
 
An absolute majority for PiS would make things worse. The party's previously outlined plans for new taxes, which include one for big supermarkets, might mean a levy on lenders equivalent to 0.39 per cent of their balance-sheet assets that would be the most punitive of its kind in Europe, according to Barclays. It could now come as early as next year, rather than 2017 as PiS had previously suggested.

There also could be political ramifications. PiS party founder Jaroslaw Kaczynski, the new government's puppet-master, is aggressively anti-immigration. PiS is keen to stand up more visibly to its Russian neighbour and intends to boost defence spending. And the party's desire to take back power from Brussels could boost the UK government's own attempts to wring greater concessions from its European ties.

But it is its heavy-handedness on the economy that risks making it harder for Poland to attract foreign investment. Just as the country's largest supermarkets are foreign-owned, the country's banking sector is still 60 per cent-owned by non-domestic investors. Both General Electric and Raiffeisen Bank International have already found their attempts to sell their operations in the country complicated by a possible government-mandated conversion of loans denominated in Swiss francs into zlotys.

Faced with so many signs of a new, interventionist approach, investors may conclude that as Poland tilts towards nationalism, their best bet is to tilt away from Poland.