On October 15, 2023, the parliamentary election were held in Poland. The incumbent socially conservative political party, Law and Justice (PiS) faced strong opposition primarily from the Civic Coalition (KO), representing the centre to centre-left. The voter turnout reached 74.4%, marking the highest in the history of Third Polish Republic since 1989. Although PiS had governed independently since 2015, the election results indicated that to continue, they would need to form a coalition with another political alliance.
Other parties that surpassed the 5% threshold in the elections included the Third Way (centre to centre-right), New Left (left), and Confederation (right to far-right).
Eight years of PiS rule can be summarized as a period of strengthening and favouring state-owned companies, significantly impacting the banking and energy sectors. The ruling party justified these initiatives as necessary measures to exert control over strategically important sectors of the Polish economy. For example, the Polish government acquired – indirectly through the largest Eastern European insurance group PZU – a controlling stake in the second largest Polish bank Pekao S.A. (PEO) from Italian Unicredit and merged its oil company Orlen (PKN) with another oil refiner & producer Lotos, the gas explorer & producer PGNiG and the utility Energa.
The introduction of the bank asset tax in 2016, excluding government bonds, resulted in an increased reliance on banks for financing public debt and negatively affected the profitability of the banking sector. As of the end of March 2023, government and guaranteed bonds in the banks’ portfolios amounted to approximately PLN 450bn, constituting about 20% of the banking sector’s assets.
As a result of the election, the five aforementioned political alliances secured seats in the Sejm. PiS obtained 194 seats, KO – 157, the Third Way – 65, the New Left – 26, and the Confederation – 18. To achieve a majority, 231 seats are needed. President Andrzej Duda (PiS) entrusted the winning party PiS with the formation of the government, but the opposition that has been formed after the election (KO, New Left, Third Way) has already reached an agreement to create a coalition. If successful, this coalition, led by Donald Tusk, the former President of the European Council, would have the majority in both the Senate and the Sejm. This newly formed coalition would also enable the rebuilding of relations with European Union (EU) and access to frozen funds from the national recovery and resilience plan (RRP) for Poland.
National Recovery Plan
Poland was initially expected to receive the first tranche of funds in June 2022, but this did not happen. A crucial factor in accessing funds from the RRP is meeting the requirements of the so-called “milestone” conditions. The primary cause of the delay in disbursement of funds by the EU was a dispute with the Polish government over the independence of the judiciary. On November 21, 2023, the recently revised plan, with a base budget amounting to EUR 59.8bn (PLN 270bn) was accepted by the European Commission. Out of this substantial sum, EUR 25.3bn will be provided in the form of grants and EUR 34.5bn as loans.
We anticipate that, following the establishment of the government of Donald Tusk, Poland will promptly fulfil milestone conditions and receive funds according to the new schedule. The plan consists of 7 key components, and we find two components of this plan noteworthy for their potential impact on companies listed on the Warsaw Stock Exchange and the overall economy.
Component G: According to the plan for the allocation of funds, over EUR 25bn is earmarked for the REPowerEU program, aiming to reduce reliance on fossil fuels before 2030 and transition into renewable energy sources. Poland will soon receive a pre-financing instalment of EUR 5bn for the implementation of the REPowerEU changes. According to the European Commission, EUR 21bn in costs related to REPowerEU will require multinational cooperation. Worth noting is the allocation of EUR 17bn to the Energy Support Fund, which will finance investments related to the energy transition, and the allocation of EUR 4.8bn to the construction of offshore wind farms.
Consequently, this opens up significant development possibilities for companies in the energy sector such as PGE, Tauron Polska Energia (TPE), and especially those involved in the renewable energy market, for example, Columbus Energy (CLC), ELQ, Raen Energy or Novavis Group
Component B: Over PLN 20bn is allocated to green energy and reduction of energy-intensity, supporting the increase in the use of alternative energy sources and improving the energy efficiency of the Polish economy. This component is related to REPowerEU as it addresses decarbonisation and air pollution in Poland. Similarly, it presents an opportunity for renewable energy companies as well as for firms cooperating with them. Additionally, there is a target reduction of energy consumption by renovating buildings, providing an investment opportunity for construction companies, for example Izolacja Jarocin (IZO), Selena FM and Ferro.
In summary, the RRP funding should help the EU to achieve its ambitious goal of becoming climate-neutral by 2050, with 46.6% (EUR 27.8bn of 59.8bn) allocated to climate contributions. The remaining components of the plan include: resilience and competitiveness of the economy, digital transformation, effectiveness | availability and quality of the health care system, green and smart mobility, Improving the quality of institutions and the conditions for the implementation of the RRP. link to the European Commission’s publication on the proposal
What is next after elections?
Currently, PiS is attempting to secure the required majority of 231 mandates. Specifically, PiS is trying to persuade the Third Way to join them in a coalition, which seems unlikely to happen as the Third Way, in its electoral plan, includes postulates directly targeting PiS. Although over a month has passed since the election, and the most likely scenario is that the opposition coalition (KO, New Left, Third Way) will form the government, there is still a lot of uncertainty.
In the electoral plans of the parties, forming the opposition coalition, there is a lack of specific demands regarding the stock exchange, and economic issues are somewhat overshadowed by primarily social matters. The main topics related to publicly traded companies include the depoliticization of state-owned companies, obtaining funds from the aforementioned recovery and resilience plan, investing in renewable energy sources, and the abolishment of the capital gains tax for savings and investments.
We believe that the abolition of this tax could lead to an increase in the share of individual investors, consequently boosting liquidity on the polish stock exchange, which is far lower than in western markets. Nevertheless, there is a relatively high chance that this tax abolition will be just an unfulfilled election promise, as within the coalition there is a leftist party that will likely oppose it and such a tax is common in other European countries.
In our view, there is a chance that state-owned companies, many of which are trading far below their book values and at low single-digit P/Es, will perform well over the next months as investors hope that the new KO-led government will improve corporate governance, rights of minority shareholders and dividend payouts. The last few weeks have shown that international investors have already become more active especially in the bluechip WIG20 index (it has increased by c. 28% over the last 3 months). We believe that if the new government really was to fulfil its promises, the whole Polish capital market would significantly benefit.
Author: Mateusz Pudlo