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Polish Economy to Slow Slightly, Fiscal Deficit to Grow

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Poland’s economic growth rate is projected to slow to 4.0% in 2019, down from over 5.0% in 2018, according to the World Bank’s latest Economic Update for Europe and Central Asia, released today.

Poland’s growth rate, which is robust compared to other European economies, will be driven by strong domestic consumption and accelerating investments, supported by low interest rates and the availability of European Union funds. On the other hand, the growth dynamics of Poland’s economy will be hindered by a slowing global economy, most importantly in the euro zone, as well as domestic labor shortages.

A proposed expansion in fiscal expenditures for social programs may accelerate economic growth in Poland in the short run – however, it would most likely lead to a widening of the budget deficit, which is already projected to increase to 1.4% of GDP in 2019, compared to 0.5% last year, and further to 1.6% in 2020.

“The Polish economy is still growing at a rate significantly above the EU average. The low unemployment rate and strong wage growth are still driving private consumption; investments, both public and private, are growing too. In 2018, the fiscal budget was close to a balance. We do expect, however, that Poland’s fiscal situation may deteriorate soon,” says Carlos Piñerúa, World Bank Country Manager for Poland and the Baltic States. “One characteristic of new social expenditure initiatives is that they tend to be irreversible in nature, for political reasons among others. That is why we are concerned that, given the growth rate slowdown, a deterioration in the fiscal and external accounts may eventually limit the country’s ability to react flexibly to emerging challenges, such as a more acute than expected global economic downturn, for example.”

The World Bank estimates that Poland’s GDP growth in 2020 will amount to 3.6%, and will slow to 3.3% in 2021. Forecasts for 2019, as well as for the period 2020-21, are the same as those released earlier, in January this year.

The expected slowdown in Poland would result from a gradual economic downturn worldwide, but more importantly in the euro zone, Poland’s biggest trade partner. The World Bank projects economic growth in the euro zone to slow to 1.6% in 2019, down from 1.8% last year, and in 2020-21 to only average 1.4%.

“The Europe and Central Asia region faces several long-term challenges including aging populations, declining productivity, weakening investments, and climate change. The good news is there are a range of policy options available to boost growth and mitigate these challenges,” says Cyril Muller, World Bank Vice-President for Europe and Central Asia. “Countries should close investment gaps, improve governance, participate more in global value chains, and ensure more people have access to financial services including bank accounts and digital payments.”

The World Bank report indicates that, in many countries of the Europe and Central Asia region, low availability of banking services is a significant barrier to economic development. In 2017, about 116 million adults in the region had no bank account. Owning a bank account is the first step to taking advantage of the full range of banking services, such as deposits or loans, which stimulate economic development. In Poland, as much as 87% of the populations own bank accounts, which is higher than the average for the entire region.

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Post-Brexit UK will continue to offer significant opportunities

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PwC’s new report, Brexit and beyond: Assessing the impact on Europe’s asset and wealth managers, outlines the chief findings from qualitative interviews with senior executives at more than 20 global asset and wealth managers (AWMs) covering both the preparations for Brexit made by AWMs so far and their views of what the future holds for their businesses and the industry as a whole.

As the political and economic climate around Brexit continues to provide uncertainty across the globe, many AWMs feel confident that they are prepared for Day One following the UK’s departure from the EU – deal or no deal. But for them, this is only the beginning of the story. AWMs are now beginning to think hard about what comes next – above all, about how to best position their businesses for future growth and profitability.

“We received a clear message that the UK will remain a very important part of Europe’s finance ecosystem beyond Brexit. To this end, and to prevent further fracture, uncertainty and costs for business and investors, there is a strong desire among our clients for close alignment based on regulatory equivalence between the UK and the EU27,” said Andy O’Callaghan, Global Asset and Wealth Management Advisory Leader.

The report details the position of AWMs on Day One after Brexit, how they anticipate their operating models changing further in the months and years that follow, and how they see the long-term outlook for the industry as a whole.

Five key takeaways from the report:

More than three years after the referendum, there is still little clarity about the future relationship between the UK and the EU. While the EU’s equivalence regime offers a potentially powerful insurance policy against future uncertainty, AWMs may suffer collateral damage if trade negotiations become politicised.

Most AWMs we interviewed say they are ready for Brexit, helped by the interventions of Europe’s supervisory authorities, and should be able to continue operating largely seamlessly, even in the case of no deal. However, market and economic volatility is a concern.

The future for the UK’s AWM sector is now unclear. Policymakers and the AWM sector will need to focus on cementing the UK’s status as a centre of excellence for portfolio management while deciding the extent of tax and/or regulatory alignment is a viable option for driving funds growth.

EU27 centres such as Ireland and Luxembourg now have an opportunity to consolidate and grow their substantial funds industries, but fragmentation and domestic competition pose a potential risk to the industry.

EU27 AWMs are still unclear about the best way to access the lucrative UK market.

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Emerging East Asia Bond Market Growth Steady Amid Global Slowdown

MD Staff

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Emerging East Asia’s local currency bond market posted steady growth during the third quarter of 2019 despite persistent trade uncertainties and a global economic downturn, according to the latest issue of the Asian Development Bank’s (ADB) Asia Bond Monitor.

“The ongoing trade dispute between the People’s Republic of China (PRC) and the United States and a sharper-than-expected economic slowdown in advanced economies and the PRC continue to pose the biggest downside risks to the region’s financial stability,” said ADB Chief Economist Mr. Yasuyuki Sawada. “However, monetary policy easing in several advanced economies is helping to keep financial conditions stable.”

Emerging East Asia comprises the PRC; Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.

Local currency bonds outstanding in emerging East Asia reached $15.2 trillion at the end of September. This was 3.1% higher than at the end of June. Local currency government bonds outstanding totaled $9.4 trillion, accounting for 61.8% of the total, while the stock of corporate bonds was $5.8 trillion. A total of $1.5 trillion in local currency bonds were issued in the third quarter, up 0.9% versus the previous three months.

The PRC remained emerging East Asia’s largest bond market at $11.5 trillion, accounting for 75.4% of emerging East Asia’s outstanding bonds. Indonesia had the fastest-growing local currency bond market in the region during the third quarter, boosted by large issuance of treasury bills and bonds.

A special theme chapter examines the relationship between bond market development and the risk-taking behavior of banks. The analysis finds that well-developed bond markets reduce the overall risk of banks and improve their liquidity positions. This suggests bond market development can contribute to the soundness of the banking system.

An annual liquidity survey in the report shows increased liquidity and trading volumes in most regional local currency bond markets in 2019 versus 2018. It also highlights the need for a well-functioning hedging mechanism and diversified investor base for both government and corporate bonds.

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Job Quality in Cambodia is Improving, but New Policies Are Needed to Benefit from Global Markets

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The diversity and quality of jobs available in Cambodia is improving, yet new policies are needed for Cambodia to benefit from the opportunities available in future global markets, according to a World Bank report, Cambodia’s Future Jobs: Linking to the Economy of Tomorrow, released today.

Of the 8 million jobs in Cambodia, 37 percent are wage jobs, many of which offer higher earnings and more protections to workers. However, the other 63 percent of jobs remain more traditional. Such jobs on family farms or in household enterprises are weakly integrated in the modern economy and offer workers lower earnings.

“The diversity and quality of jobs in Cambodia has gradually improved,” said Inguna Dobraja, World Bank Country Manager for Cambodia. “But global trends, such as the growing Asian middle class, shifting trade patterns, and automation require that Cambodia re-think its jobs strategy as it advances to the next stage of export-led development.”

Foreign-owned firms have been significant contributors of higher quality jobs in Cambodia. By 2015, one-third of all wage jobs in Cambodia were in foreign-owned firms. During the period 2010-2015, the garments industry was the fastest-growing occupation sector, increasing its share of employment by 1.1 percent per year.

Domestic firms are more numerous than foreign-owned firms, but they do not contribute as many jobs. Domestic firms employ an average 8 workers, compared to 124 in foreign-owned firms. A key concern is ensuring Cambodian workers are equipped with the skills to compete with workers from other countries for jobs in foreign-owned firms. In 2016, 37.6 of exporters cited an inadequately educated workforce as a top business obstacle.

The report recommends a four-pronged strategy to securing more and better jobs in the future: diversify exports into higher value-added production; create a domestic business environment that supports local firms growth; strengthen linkages between the domestic and export sectors of the economy; and invest in workers’ skills and education. The report further details seven policy recommendations that would advance these strategic goals:

Diversify exports and foreign direct investment (FDI) into higher value-added value chains. Most current jobs are in low-value segments of global value chains. Simplifying processes, providing incentives to foreign investors, and creating quality assurance facilities will encourage diversification of exports and FDI into higher value-added value chains or segments of value chains.

Streamline procedures and reduce the costs of establishing and expanding small- and medium-size enterprises (SMEs), which have considerable potential to create jobs. Such policies would include reducing the cost of doing business for local firms, increasing firm contributions to worker skills development, increasing access to financing through grant programs and fiscal incentives, and providing support to firms to hire more workers.

Help household enterprises enhance their productivity and create better jobs. Household enterprises account for one out of every five jobs in Cambodia and this will grow with increased urbanization. Information technology, for example, can help household enterprises improve their basic business practices and access broader markets.

Support the development of links between exporting FDI firms and domestic input-supplying firms, by, for example, providing incentives to foreign firms to source their inputs from local SMEs, creating a directory of local suppliers with the capacity to partner with foreign firms, and establishing local supplier development programs.

Build a skills development system that will attract higher-value FDI and increase productivity across the economy. Cambodia’s workforce is getting by with only 6.3 years of education on average. Policymakers should focus on reforming today’s education system to help the tomorrow’s workers acquire the broad range of skills needed to work in a knowledge-intensive economy andengage enterprises in the design, financing, and support of a technical and vocational training system to serve today’s workers.

Promote efficient labor mobility and job matching by opening formal international migration channels and supporting programs that encourage circular migration, and by disseminating information about job opportunities inside and outside of the country to students, jobseekers, education and training institutes, and employers so that skills development choices are aligned with the changing labor market demand.

Regain macroeconomic independence and exchange-rate flexibility. US dollar fluctuations have a significant impact on Cambodia’s trade and commodities sectors, which are responsible for most of the country’s jobs. As Cambodia begins to export to a broader range of countries, macroeconomic and fiscal stability will help shield existing jobs from factors related to the US dollar.

“The success of Cambodia’s job strategy will depend on the participation and cooperation of stakeholders across the economy, not only policy makers and government leaders, but also entrepreneurs, investors, development partners, and, of course, workers themselves,” said Wendy Cunningham, Lead Economist and a lead author of the report.

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