Emerging Markets – Poland: opportunity in geopolitical volatility
25 March 2025
Last month, our EM specialist investment partner, Northcape Capital, visited Poland to conduct on the ground research into the country’s current economic and political environment. Poland continues to offer opportunities for investors and is currently categorised by the investment team as a “Most Preferred” sovereign. Here they share their findings and reasons for optimism for the country’s trajectory.
This information has been prepared by Northcape Capital, the underlying investment manager for the Warakirri Global Emerging Markets Fund.
Opportunities in Geopolitical Volatility
Last month some of the Northcape Capital investment team visited Poland and Hungary, two interesting emerging markets, both with a number of high-quality companies, focused on shareholder value creation.
The Polish stock market has been a strong performer so far in 2025, with the local WIG Index +20% in local currency terms year to date (at time of writing). It has been boosted by the rising probability of a cease fire in Ukraine.
Meanwhile the underlying economy has continued to recover following weaker performance in 2023. GDP growth for 2024, when published, is expected to rebound to around 3% driven by recovering domestic demand, a dramatic pick up from the 0.1% recorded in the prior year. The government expects a further acceleration in real GDP to 3.9% in 2025 driven by private consumption and higher domestic investments on the back of accelerating EU fund transfers (Poland has the 3rd largest EU fund receipts at EUR 60bn p.a.).
Notwithstanding Poland’s strong economic recovery, there are two important considerations which must be noted. First, the country’s budget deficit is estimated to rise to 5.7% of GDP in 2024 (from 5.3% in 2023) due to some one-off expenses on public wages, lower tax revenues and the impact of severe flooding caused by Storm Boris. The government projects the deficit to remain elevated at 5.5% in 2025. Further, increased military spending (expected to remain at least 4% of GDP on average in the medium-term) remains as one of the key pressure points for fiscal balance. Military spending will account for 4.1% of GDP in 2024, and 4.7% in 2025.
Poland leads the EU in defence spend
As Exhibit 1 shows, Poland leads both the EU and NATO in military spend relative to GDP. There are two main reasons for Poland’s significant ramp up in defence spending. Firstly, is the country’s precarious position in a volatile region. In addition to significant borders with both Belarus (a “vassal state” of Russia, according to the New York Times, and home to numerous tactical nuclear weapons) and Ukraine. It is sometimes forgotten by those in the West that Poland also borders Russia itself. The small strip of land to Poland’s north known as Kaliningrad is part of Russia and, as the only ice-free port on the Baltic Sea, of critical geopolitical and military value.
Exhibit 1: Poland has Become NATO’s Biggest Spender on Military Relative to GDP
Source: ICAEW
The second reason was described to Northcape in a private meeting in Warsaw with Grzegorz W. Kolodko, former Deputy Prime Minister for Poland under four Prime Ministers between 1994 and 2003. Over the past decade there has been a growing sentiment in Washington that Germany – the lynchpin of the United States’ Europe strategy in the post-war period and home to 34,000 U.S. military personnel, the most in the region and second only to Japan – has become an unreliable partner for America.
Poland is seeking to take the mantle from Germany and become the main U.S. military partner for Europe. The rationale is a combination of enhanced defence, given Poland’s belligerent neighbours, and economic policy. Becoming the United States’ primary military partner in the region is likely to lead to significant investment flows (FDI) for Poland and will help cement the country as a key hub of manufacturing in Europe.
Poles head to the polls in May
Most economists expect CPI inflation to accelerate towards 5% in the first half of 2025, fuelled by strong wage growth, the unfreezing of energy prices and excise duty hikes. A base effect in prices is expected to kick in in the second half of the year, likely resulting in a moderation in inflation towards the central bank’s target range (2.5% ±1%) by year-end and hence providing space for rate cuts towards the end of the year. The situation in Ukraine of course remains the key uncertainty.
Poles will go to the polls for the first round of the presidential election on May 18, followed by a second round on June 1, in an important election for the country. The current President, Andrzej Duda, is from the Law and Justice party (PiS) and holds several public political views seemingly at odds with the nation’s Prime Minister Donald Tusk. Unlike the openly pro-EU Tusk, Duda has been more sceptical of the influence of Brussels, famously saying “I won’t agree to a dictate of the strong. I will not back Europe where the economic advantage of the size of a population will be a reason to force solutions on other countries regardless of their national interests”.
Duda is notably more conservative than Tusk and the EU on social issues such as gay marriage. Whilst Tusk has to some extent moved rightward under the influence of Duda and the PiS, for example becoming more vocal in his opposition to illegal migration and prioritising border security, the upcoming May election presents the possibility of a new president who holds political views closer to that of Prime Minister Tusk. Such an outcome would result in less divided Polish politics and would hence be positive for the Zloty and the risk premium of Polish assets.
Regardless of the election result, Poland will likely continue to benefit from the regionalisation of manufacturing and supply chains as the structural shift away from reliance on China continues. The country will also continue to capture a larger share of Western Europe’s services sector, including financial services and IT. As Exhibit 2 shows, Polish wages are below the EU average.
Exhibit 2: Poland’s labour costs are significantly below the EU average
Source: European Commission
The country has a large population of 37 million, the biggest in Central Europe after Germany, is highly educated by regional standards and possesses a strong work ethic. This will help underpin solid economic growth, as Poland steadily closes the gap with its wealthier neighbours to the West.
Summary
Following our visit to Poland, we remain optimistic about the country’s trajectory. With steady GDP growth underpinned by favourable economic policies, we continue to categorise Poland as a “Most Preferred” EM sovereign. We are confident in our current portfolio positions in Poland and anticipate continued solid returns.
For more information, please contact us on 1300 927 254 or visit Warakirri Global Emerging Markets Fund.
The information in this document is published by Warakirri Asset Management Limited ABN 33 057 529 370 (Warakirri) AFSL 246782 and issued by Northcape Capital ABN 53 106 390 247 AFSL 281767 (Northcape) representing the Northcape’s view on a number of economic and market topics as at the date of this report. Any economic and market forecasts presented herein is for informational purposes as at the date of this report. There can be no assurance the forecast can be achieved. Furthermore, the information in this publication should only be used as general information and should not be taken as personal financial, economic, legal, accounting, or tax advice or recommendation as it does not take into account an individual’s objectives, personal financial situation or needs. You should form your own opinion on the information, and whether the information is suitable for your (or your clients) individual needs and aims as an investor. While the information in this publication has been prepared with all reasonable care, Warakirri and Northcape do not accept any responsibility or liability for any errors, omissions or misstatements however caused.
