Last year, analysts were talking of a Polish economic miracle, hailing the country’s natural entrepreneurship and its shrewd investment
of EU funds. The Warsaw Stock Exchange epitomised that miracle, rising 53% over the course of 2017 to outperform all other emerging markets. Yet now that same stock exchange is reeling from an 18% drop, with investors spooked by new reports that the Polish government is
making wholesale changes in state-owned companies.
In fact, the CEOs of nine state-owned enterprises, or SOEs, have been replaced this year alone, and around 20 senior managers have lost
their jobs. Poland’s right-wing Law and Justice Party (PiS), which won power three years ago, has removed senior figures across the
state-owned sector in an attempt to push its nationalist agenda and remove opponents, inflicting the sort of damage observers predicted
when it took office from the centrist Civic Platform. The Polish government has the ability to control listed firms even without majority ownership, and it has issued minimal explanation for the recent changes.
For instance, respected business leaders, such as Michael Krupinski, head of insurance giant PZU, have been fired without any reason and replaced by government loyalists such as Malgorzata Sadurska, a presidential aide who was promoted to the PZU board despite having no significant business experience. Government sources even admitted that they removed Wojciech Jasinski, the CEO of refinery PKN Orlen,
in February because he refused to fire Civic Platform loyalists.
Political Interference Spooking Investors
This sort of instability and political tampering is understandably troubling for international investors who were initially drawn to Poland by its economic liberalisation. Yet it is not the only reason for concern. Plans to merge two of the country’s biggest banks, Pekao and Alior, have also caused anxiety among analysts, who said Pekao’s potential to pay dividends – its key selling point – would be reduced as a result of the deal. There is additional concern over the future of other sectors, notably energy, with uncertainty over plans to build a nuclear power plant. The government had initially tabled plans to construct the plant in 2009, but they have since run into numerous delays due to declining power prices and the 2011 Fukushima accident.
On some levels, of course, the turbulence in Poland’s state-owned industries is only par for the course in Central and Eastern Europe, where SOEs are far more common than in the West. Such companies often provide an easy target for unscrupulous governments, given the lack of scrutiny and effective regulation that protects them, and nationalist rhetoric gives such governments an easy way to justify interference – thereby cementing their power base while topping up party funds with the seizure of company assets.
In Romania, for instance, a country of around 1,200 SOEs – the largest state-controlled sector in Europe – the average state-owned company
boss lasts less than a year before being ousted. Although Romania has managed to elevate the performance of SOEs in the energy sector, through improvements in corporate governance as well as privatisation and the sales of minority stakes, state-controlled firms in other industries remain blighted by government interference, bogged down by endemic corruption and mismanagement.
For foreign investors in Bulgaria’s energy sector, the picture is equally murky. Companies have been pulling out of the country recently, with names such as Enel, EON and CEZ deciding to pack up. Their main gripes revolve around the way the discretionary regulatory changes the government has been implementing seem to put foreign investors at a disadvantage, to the benefit of state-owned companies or firms with close ties to the leading Bulgarian political parties. Under the guise of creating a level playing field in the energy market, the Bulgarian government recently took the worrying step of announcing it would challenge the power purchase agreements it had with private investors AES and ContourGlobal, claiming they are too expensive – even though, as the FT pointed out, they are cheaper than the nuclear plant Sofia is currently building in Belene with Russian help.
Given the context in the region at large, then, investors’ concern about the recent developments in Poland may initially seem surprising. Yet
the situation there is particularly delicate given the country’s ongoing dispute with the EU. Poland receives more aid than any other member state, yet Brussels is threatening to cut this funding unless Polish prime minister Mateusz Morawiecki can demonstrate that his government is not subverting judicial independence. The Polish Government has pushed through plans to lower the retirement age of Supreme Court judges, forcing around 40% of the current bench to step down in what critics believe is another example of PiS trying to control key positions. With the EU already planning to divert funding from northern states to those further south, Poland’s judicial reforms could lead to a dramatic reduction in EU handouts – and place even greater importance on the country’s industrial performance.
With such challenging political headwinds, it is unsurprising that the turmoil in Poland’s state-owned sector is a step too far for many investors. Now the PiS administration faces a choice: either leave the country’s SOEs alone or face a flight of foreign capital as well as hugely damaging cuts to the country’s credit rating. When Morawiecki was appointed prime minister last year, his background in international banking suggested he would be friendly to foreign investors. Now, for the sake of his country, he must live up to that billing.
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