Poland's Current Account Deficit: A Growing Concern for Investors?

Poland's economy has long been a bright spot in Central and Eastern Europe, driven by strong domestic demand and steady GDP growth. However, recent data reveals a troubling trend: the country's current account deficit has widened significantly in early 2025, raising questions about its sustainability and potential risks for foreign investors.

The Deficit in Context

Poland's current account deficit hit €1.74 billion in May 2025, marking its 13th consecutive monthly deficit and a sharp increase from €468 million in May 2024. This deterioration stems from two primary factors:

1. Trade Imbalance: The goods trade deficit expanded to €1.44 billion, as imports surged by 4.5% (to €29.6 billion) while exports grew more modestly by 3.4% (to €28.2 billion). Key drivers of import growth include rising purchases of arms, agricultural products, and consumer goods, while falling oil prices only partially offset these costs.
2. Primary Income Outflows: Income payments to foreign investors widened to €3.29 billion, fueled by higher returns on foreign portfolio holdings. This reflects Poland's growing reliance on external capital to fund its economic activity.

Meanwhile, the services sector provided a partial offset with a €3.25 billion surplus, up slightly from 2024, while the secondary income account recorded a €264 million deficit, highlighting weaker transfers from abroad.

Sustainability Factors

Analysts project the deficit to narrow to 1.0% of GDP by year-end 2025, with further reductions to 0.8% in 2026 and 0.7% in 2027, as export growth stabilizes and import pressures ease. However, several risks cloud this outlook:

• Trade Dynamics: Poland's export sectors, including pharmaceuticals and automotive parts, face competition from EU peers, while imports continue to outpace exports due to strong domestic demand.
• Fiscal Challenges: A 5.1% fiscal deficit in 2023 and 49.6% public debt-to-GDP ratio limit the government's ability to address imbalances via spending cuts or tax reforms.
• Foreign Capital Dependence: The widening primary income deficit underscores Poland's reliance on foreign portfolio and direct investment. Should global risk appetite wane, this could trigger capital outflows, exacerbating the deficit.

Implications for Foreign Investors

The deficit's sustainability hinges on whether Poland can rebalance its trade and reduce reliance on foreign capital. Here's how investors should navigate this landscape:

Sectors to Watch

• Export-Oriented Industries: Sectors like pharmaceuticals, toys, and buses (which saw strong export growth in May) offer opportunities. Look for companies with pricing power or exposure to resilient global demand.
• Services Sector: The services surplus (driven by tourism, IT, and logistics) suggests long-term growth potential. Firms in these areas may benefit from Poland's expanding middle class and digital transformation.

Risks to Avoid

• Import-Intensive Sectors: Companies reliant on imported raw materials (e.g., automotive parts dependent on global supply chains) face margin pressure as import costs rise.
• High-Yield Debt: While Poland's 5-year bond yields remain attractive at 3.8% (as of July 2025), a sudden reversal in foreign investor sentiment could push yields higher, increasing borrowing costs.

Long-Term Opportunities

Poland's green energy transition and digital infrastructure initiatives, aligned with EU funding, could attract foreign capital. Investors in renewable energy projects or tech-enabled logistics firms may find value.

Investment Recommendations

1. Diversify Exposure: Avoid over-concentration in sectors vulnerable to trade imbalances.
2. Monitor Capital Flows: Track foreign portfolio inflows and bond yields—sudden shifts could signal broader instability.
3. Focus on Structural Reforms: Companies contributing to productivity gains (e.g., automation, green tech) may weather the deficit better.

Conclusion

Poland's current account deficit is a mixed signal. While it reflects strong domestic demand and economic activity, its widening trajectory poses risks to foreign investors. Success hinges on rebalancing trade, reducing reliance on external capital, and leveraging structural reforms. For now, a cautious, sector-specific approach is advisable—prioritizing export-driven firms and avoiding industries overly exposed to import pressures.

Investors must remain vigilant: Poland's economic resilience will determine whether this deficit becomes a manageable hurdle or a long-term liability.