Poland Defence and Security Report Q3 2009

The latest data for February show a EUR525mn current account surplus for Poland, the first monthly surplus since September 2006 and the largest positive outcome since the beginning of the National Bank of Poland (NBP)’s data series in 2001. Although monthly balance of payment data is notoriously volatile and subject to frequent revision, we nonetheless believe that, given sustained zloty weakness and the collapse in consumer confidence towards the end of Q109, the current account shortfall will deflate through 2009. Indeed, we forecast the deficit reaching 3.5% of GDP in 2009, narrowing further to 0.5% by 2013.

Leading indicators suggest that while the Polish economy may have sidestepped recession during the first quarter of 2009, the collapse in consumer spending in the following quarters will likely tip the economy over the edge by mid-year. Moreover, though our global outlook projects an economic trough in H109 for most developed markets, we believe that the Polish economy will bottom out in Q209-Q309, and will enjoy a fairly spritely recovery thereafter.

In February, the government announced a savings plan worth PLN19.7bn, aimed at bolstering economic stability and preventing an escalation in the government’s external borrowing costs. The majority of the savings would come from ‘freezing investments’, said Slawomir Nowak, a top aide to the Prime Minister.

Among these investments is Poland’s ongoing force modernisation initiative, which aims to improve force compliance with NATO standards. In March 2009, defence minister Bogdan Klich said that ‘as regards technical modernisation our funds have been cut by half’, and that the army technical modernisation plan is a ‘rather gloomy prospect for 2009’. This contrasts starkly with the December announcement that the defence ministry’s investment budget for 2009 would be the highest since the dissolution of the Warsaw Pact.

In January 2009, Polish armed forces ended their long history of conscription, a significant milestone in force professionalisation. The remaining conscripts will complete their nine month service by August.

A continuing dominant development is Poland’s agreement, on August 20 2008, to allow the US to install 10 interceptor missiles on Polish territory. The agreement calls for deployment of interceptor missiles in Poland and an advanced radar station in the Czech Republic. The defences are designed to protect U.S.

European allies from the threat of long-range ballistic missiles and are, in particular, aimed at protecting Europe from potential attack by Iran. All 26 NATO allies back this deployment, though it is vehemently opposed by Russia. The US denies that the missile defence poses any threat to Russia’s ballistic arsenal, but their deployment has strained relations between Poland and Russia. In response, Russia could make an ‘asymmetrical response’ by supplying Venezuela with the superior S-300 air-defence system.

Poland continues its push for eurozone entry in 2011, despite the deteriorating exchange rates of eastern European currencies. Prime Minister Donald Tusk reiterated this position as recently as March 1 2009 in Brussels, at an EU summit on the financial crisis. However, we believe that this accession target is a little optimistic, with BMI predicting an adoption date of 2013.

This quarter, we have introduced a significant new aspect to BMI’s Defence reports, which is the City Terrorism Rating (CTR). This assesses the risk of a terrorist attack. The CTR takes into account the overall BMI Terrorism Rating for the country in question. It also incorporates the ‘prevalence’ of terrorism, which recognises the frequency of attacks, and whether the city is a target for terrorists. The CTR also recognises the ‘threat’ of terrorism in terms of the likely numbers of victims and the ability of groups to launch sustained campaigns. In Poland we assess the CTRs for Warsaw and Krakow. The CTRs for these cities are both 95.0. In the Central and Eastern European (CEE) and Central Asian region both cities rate very highly.