Poland's Shale Gas: Benefits and Drawbacks

Again on the shale gas issue.

One of the reasons Poland was able to avoid a recession whilst everyone around them contracted was that Poland had an independent currency that happened to be valued lower than both the dollar and the euro.  This low-value currency makes Polish goods and services cheaper (and imports more expensive, which incentives Poles to buy Polish goods), also it makes Poland an attractive place to invest.  Foreign companies are tripping over themselves to set up shop in Poland (Dell, Fiat, GM, and now energy companies.)  The zloty is now being looked at as a cherished pillar of the Polish economy, and skepticism of the euro has grown (especially after seeing what happened recently to Greece.  Many in Greece lamented being tethered, which was relatively strong, and not being able to de-value the currency to give a jump start to Greek exports.  Also, China keeps the yuan pegged lower to the dollar for just this reason: to make Chinese exports more attractive.  Right now, many countries are engaged in a 'race to the bottom' of de-valuing their currencies.)
Huge energy reserves are a mixed blessing, and it is right to fear the onset of Dutch disease.  Dutch disease describes an economic condition where one commodity (usually energy or natural resources) becomes a main engine of the economy and the currency rapidly gains value against other currencies.  It's called a disease because with the rise in the currency, the country no longer becomes a feasible place to manufacture goods and its agricultural exports become more expensive.  Commonly-cited examples are Venezuela (oil), the US (financial services in the '80s and '90s), Russia (oil and gas), and, of course, the Netherlands (the discovery of gas).  When prices are high and everything is humming alone, it's all good; once the price of gas crashes, Poland's economy goes into a tailspin and only recovers when the price of gas does (this recently happened to Russia (the price of oil and steel dropped in 2008) and Venezuela.  It also happened to Ireland and Iceland with the banking crises.)  This can be mitigated by proper investment into wider areas of the economy.
A huge explosion (pardon the pun) of gas exports from Poland would undoubtedly cause the zloty to rise, maybe even overtaking the euro.  If that were to happen, Poland's developing manufacturing and agriculture base would come to a screeching halt.  Foreign companies would move their factories to cheaper countries and Polish-manufactured goods would become quite expensive.
The zloty's rise would, however, coincide with the mandated move to the euro (if the euro still exists around then.  Some think that the euro will be gone within five years, probably because Germany will pull out.  NOTE:  I'm not going to opine whether I think the euro will stick around.  I honestly don't know.)  So, the zloty's rise would be drowned out, because then Poland would enter into the euro area and the currency would depend more on the strength of the area than just that of Poland alone.

Beyond this sudden "doom and gloom" image I painted, the outlook certainly looks good.  Even if the zloty rises, that means that imports, and thus variety, are cheaper (I went shopping today, so I can tell you that I was none too pleased over the choices and variety of foodstuffs.  500 types of pickles, but no tahini: this isn't fair.)  The average salary in Poland, which now stands under $20K, would most certainly rise.  Poland would pour even more money into infrastructure improvements.  Also, it would help mitigate the problem of Poland's aging and shrinking population (another topic to which I will devote a post) by helping to prop up their pension and health programs.
Money is money, and resources are resources.  But Poland will have to be careful how it handles this new-found gas.  If they don't handle it just right, it might come around to bite them in the ass years down the road.

Tail-Whip

The recent, and rapid, decline of both the Euro and the Zloty against the US Dollar has left me a little unnerved. I expected the Euro to drop according to Greece's woes (as well as those of the entire so-called PIIGS Bloc) but was a little shocked to see how the Zloty fell as well. It's a common misconception that the Zloty is pegged to the Euro, much like the Lithuanian Litas, but isn't. This misconception, as well as the thought that the EU's economies are so tightly integrated, creates a psuedo-pegging.

See, the Zloty isn't pegged to any currency and its governing body is the NBP; however, the Polish economy is so heavily reliant on those in the Euro Area. Since Poland's economy relies so much on countries that use the Euro, it is necessary to take these economies into account when valuing the Zloty. As such, the Zloty fluctuates wildly against the US Dollar, mimicking—in a greater degree—the Euro. When the Euro rises against the dollar, the Zloty will appreciate more; when the Euro falls, the Zloty will fall even further.

All of this is fine and dandy, but it creates a problem for me: I get paid in Zloty, but I generally think of myself earning in dollars (my debts are in dollars.) Summer, 2008, was a very good time when the exchange rate was near 2:1. The Zloty had been falling against the dollar this spring (2.8:1) but has recently dropped to levels I haven't seen since the summer of last year. The Euro has dropped to about 1.2:1 and is expected to reach parity. So, this is generally good news for Europe (especially Airbus, which sells its planes in dollars, but reports earnings in Euros.)

Good for Poland? You bet. Poland is looking ripe for investment. The weaker Zloty makes Polish goods and services cheaper in international trade. Many countries are in a "race to the bottom" to devalue their currency (China has held this as national policy and it's pissing the US off.) The US was hoping to make the greenback crap its pants and lose so much value that American goods would become the most viable choice when buying big-ticket items (planes, guns, machinery.) Unfortunately, Greece had to screw everything up.

Little Vacay

I haven't been writing so much these past few weeks. I will be back with all sorts of news, from the floods, to elections, to the drastic drop in the Zloty (and everything in between.)

Spring is here and the days are marked by passing clouds and showers and some heated sun. The garden on the balcony is starting to take off. People still tote coats around, but even the nights can be sometimes balmy.

Oh, and the US just parked a PATRIOT missile battery in northern Poland. The Ruskies are pissed.

It's Official: Buy Złoty!!!

With Greece still swirling around in the toilet, waiting for Germany to scoop them out and pat them down, the Euro is taking a moderate beating. Many economists see the depreciation of the Euro as a moderate-term event; meaning both the Dollar and the Zloty will be gaining ground against it in the immediate future. The US is expected to raise rates from the near-0% it has now before the ECB does, since the Euro Area has to deal with this new crisis. Poland already has higher rates than both the ECB (Euro Area) and the US, so it behooves one to to borrow from the ECB and invest in Poland. You borrow money for almost nothing, and get a higher return.

In a previous post, I commented how the weakness of the Zloty helped the Polish economy by making Polish goods and services cheaper compared to other countries. I also noted that it was a double-edged sword in that it make imports more expensive (it did: the prices rose by about 30%) especially for energy, namely, oil. Well, I have a two points to make concerning the Zloty's weakness.

I forgot to add that while the Zloty was weaker, making energy more expensive, energy prices themselves were falling rapidly. Oil dropped from $147/barrel to almost $30 faster than you could say "Well, fuck me!" So, while the Zloty was trading near 2 PLN to the $1 in mid-2008, it dropped to almost 3.50 PLN to the Dollar in early 2009, but also energy prices followed suit, taking care of the difference.

The second point, is based on Poland as a brand. Let's face it, Poland isn't exactly known for the quality of its products (Belvedere Vodka excluded, which is known as a premium vodka brand in the US.) Countries like China, India, and the Philippines aren't either, while countries like Switzerland, Germany, and Japan are. The point I'm trying to make is that people will buy Polish goods because they are cheap, not because they are expecting quality. People will buy Swiss and German goods (and pay a little extra) because they think they are getting a superior product, especially in the terms of quality. So, until Poland because a known for its high standard of quality, it should have every bit of help it needs to make its goods cheaper, i.e. a weak Zloty.

By the way, I'm looking forward to seeing how this all turns out. If I'm wrong, so what (barely anyone reads this anyway, and I'm sure even fewer actually take my advice to heart.)

Oh, Euro

There is a big focus and scrutiny of the Euro these days. Many analysts are wondering if the decade-old mega-currency can actually survive this economic downturn. Greece, Ireland, Portugal, Spain and any other countries ready to step forward with their massive debts, have all cast a pall over their common currency. This leaves many questions for Poland, which is currently not in the Eurozone.

The Euro: The next world currency? Or resigned to the dustbin of economic history?

Poland, which was aiming to go over to the Euro in 2012 (just in time for the Euro Cup) probably won't any time soon. I can't blame them. It makes economic sense; many credit the Zloty for helping Poland be the only EU country not to head into recession.

See, the weakness of the Zloty makes Polish goods cheaper to foreign buyers, even for other EU countries (which use the Euro.) While a struggling country, like Ireland, has seen its costs of production rise with the Euro's strength, Poland's remain relatively low. It's the same strategy that the Chinese are using. Companies have responded by shifting a great deal of production to Poland (Dell, for one, moved its massive computer plant from Limerick to Lodz.) Poland and the Czech Republic recently overtook Italy for the amount of cars produced. The exchange rate of the Euro-Zloty can also have a effect on tourism. With the rise of the Euro against the dollar, the Americans have found that it's becoming more expensive to visit the typical places like France, Spain, and Italy. Tours to Poland and the rest of Eastern Europe (including Russia) have risen over 100% since the recession began. Medical tourism is also a small cash cow; many Germans pass over the border for dentist visits and such (don't expect many Brits to do that though; they just come for the strippers.)

A weak Zloty is not all good news though, it makes things like foreign imports (energy especially) more expensive. But, with all this production shifting to Poland anyway, that might just deaden the blow; that, and the fact that the Poles have accepted that foreign stuff is going to cost an arm and a leg.

Talking to people on the street, one may get the sense that they aren't really looking forward to the Euro. Many believe it will drive prices up (see: Cappuccino Effect) and that wages won't follow. Not all are against it, the Government is pro-Euro as are some businessmen. The cost of intra-European trade would decrease and become stable and predictable. Ask a Pole on the street what the greatest benefit the Euro would bring, and the answer would be, "I wouldn't have to change money when going to Ireland/Germany/Italy."