Poland faces a complex election season with significant downside potential for growth in 2024
Any failure to unlock EU Recovery and Resilience Fund transfers before the end of Q4 is likely to place downward pressure on the zloty, feeding through to inflation and interest rates held higher for longer, dampening the demand environment in 2024 and complicating the business environment. While this represents a downside scenario with a probability at around 30%, this is high enough that MNCs should not ignore the possibility. It also indicates that our expectations contain substantial potential for upside, with gradually falling interest rates and improving investor and consumer confidence through 2024. Given significant uncertainty at this point, businesses should consider liaising with government relations teams and maintaining close monitoring of developments in the coming weeks to anticipate potential fiscal reforms and assess the impact on core customers.
Overview
- United Right, dominated by the Law and Justice party (PiS), is polling around 36%, with the opposition Civic Coalition (KO) at 29%. KO’s potential coalition members, Lewica and Third Way (TD), are both polling around 9%, just above the 8% threshold for alliances. The combined pro-European vote currently remains short of a majority however.
- The Eurosceptic Confederation of Freedom and Independence has been gaining in the polls in 2023, moving from 7% to 14% in the last six months. It has refused to discuss forming a coalition with either side.
- Access to over EUR 35 billion (c. 5.3% of GDP) in EU recovery funding will remain on hold until after the vote.
Our View
An incumbency advantage combined with the polling lead that the PiS takes into the election season means our base case remains for a PiS-led government, which we expect in about 50% of outcomes. However, the potential for an opposition victory remains high at around 45%, and we place the chances of no party being able to form a government at the residual 5%. Top of the agenda for the new government will be unlocking substantial EU funds that have been on hold around concerns over the rule of law. Gaining access to funds would likely be easier in the case of a KO-led government, as the PiS is expected to remain indifferent to further inflaming tensions with the EU during the campaign. That could lead to upside for the zloty and investor confidence if KO succeeds in securing a coalition majority, although our base case remains that any feasible government is likely to be more willing to compromise in the aftermath of the polls, including one led by PiS, and an agreement on funds disbursement in Q4 is still the most likely overall outcome at around a 70% chance. That probability is significantly heightened, however, to near certainty in the case of an opposition victory.
Any delay to forming a government, which could negotiate with the EU to strike a deal before the end of Q4, risks losing recovery funding. This could become problematic, with slower growth and possible zloty weakness complicating the inflation picture and leading to a potentially softer demand environment in 2024, with the possibility of longer-term growth consequences. With the country expected to run a substantial fiscal deficit through 2023 and into 2024, excessive deficits could contribute to further issues with the EU, which would be complicated again in the event that the government becomes reliant upon the support of the deeply Eurosceptic Confederation of Freedom and Independence.
The Confederation is the only party with significant upward momentum, having almost doubled support from 7% to 14% in 2023. Although there are difficult ideological divides with both main parties, should their seats become critical to forming a government, they are more likely to find an accommodation with the PiS than with the pro-EU opposition. However, It is not clear whether the party will be able to maintain its surge in support through to the election, and the Confederation’s progress in the coming weeks remains a factor to watch. The party also has the ability to act as a spoiler, refusing to participate in government and forcing a second election, thus making it extremely unlikely that Poland would be able to access RRF funding before the end of Q4.
Concerns also exist around the stability of any opposition coalition with a marginal majority, although we remain of the opinion that the prospect of replacing the current PiS-led government should prove sufficiently motivating to hold an opposition coalition together into the medium term. An opposition coalition may not have the 276 seats needed to overturn a presidential veto, however, which could complicate the policymaking environment.
So far, neither KO nor PiS has shown a sustained ability to attract the other’s voters, with the main pro-European parties largely exchanging support between them. Turnout could therefore be critical, and the government so far plans to hold a number of referendums on polling day, which we assess are primarily aimed at increasing electoral turnout and strengthening the PiS campaign. These include asking voters whether they support raising the retirement age, privatization of state-owned enterprises, and the EU’s migration reform. On the latter, PM Mateusz Morawiecki has described the question as reading, “Do you want to accept thousands of illegal immigrants from the Middle East and Africa?” These questions align closely with attack lines that the United Right is taking against the main opposition party and its leader, Donald Tusk, who previously raised the retirement age and is being painted by the PiS as pro-migration and closely aligned with foreign corporate interests. If this strategy motivates the PiS base to turn out, however, and succeeds in linking these issues to the KO leader, then it could provide an advantage on polling day.
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