POLAND: Article of faith

15/05/2010 | Kamil Tchorek

Poland’s economic resilience in the face of global crisis has been much applauded. Yet many argue that its relative stability is as much down to fortune as foresight. As Europe readies itself for renewed turbulence, the real test could lie ahead

In 2009, Poland was the only European Union state to maintain economic growth. Now a country that was once a byword for post-Communist mismanagement and corruption is increasingly seen as a low-risk market during times of economic uncertainty.

Last year’s growth of GDP by 1.8% is expected to accelerate to 3% this year, outpacing anticipated euro-area growth of 1%, and in the 12 months to March, Poland’s industrial output grew by 12.3%. At the same time, policy-makers see no inflationary threat, and have kept the benchmark interest rate at a record low of 3.5% for 10 months. A strengthening currency had reduced inflation to its lowest rate in almost three years. Unemployment has risen in the past two years to around 13%, but that contrasts with 20% shortly before EU accession.

“We decided very early on not to introduce a stimulus and instead rely on automatic stabilizers to do the work,” Poland’s finance minister Jacek Rostowski told Emerging Markets in a recent interview. “This strategy worked well for us.”

Poland’s ultimate stress test was arguably the April 10 air crash in Smolensk, Russia, which killed president Lech Kaczynski, central bank governor Slawomir Skrzypek, the cream of the nation’s military elite and senior clergy. Financial markets remained calm – a testament to confidence in the resilience of the Polish state and also trust in the buoyancy of its economy.

Yet Poland’s relative economic stability is as much down to fortune as shrewd economic policy or foresight.

EU integration has meant that the Polish market has converged with the rest of the continent, causing export demand to boom, particularly from Germany. Moreover, the billions of euros of direct aid injected into the economy since EU enlargement in 2004 have worked as a multiplier for private-sector productivity.

That said, Poland remained under-developed in several ways – a fact which has also reduced its exposure to many of the problems facing more advanced economies. Earlier in the 2000s, motor investment bids were lost to Slovakia and the Czech Republic, which have since suffered the brunt of the crash in the auto industry. The financial sector has remained small compared to the wider economy, and never became over-dependent on the US and western Europe. Polish high street banks have remained notoriously risk averse, so mortgage debt remains about 15% of GDP, compared to around 90% in the UK. Unlike the Baltic states, Poland failed to bring the Polish zloty closer to euro convergence. So although the flexible currency has been on a roller-coaster ride through the crisis, it has also worked as a shock absorber.

But as Greece’s debt woes threaten to spread across the eurozone, Polish policy-makers aren’t taking any chances. Deputy central bank head Witold Kozinski said recently that Poland’s euro adoption plan will be delayed further by the Greek crisis. Although he declined to specify when Poland could join the single currency, Kozinski said it would enter the euro zone eventually.

But Poland may well place far less emphasis on joining the euro as a result of the Greek crisis. “The lesson we have learned from Greece is that the euro isn’t a medicine that we should depend on,” says Jaroslaw Janecki, chief economist at Société Générale in Warsaw. “Poland must concentrate on public finances rather than eurozone entry.”

Much uncertainty surrounds the impact of Greece’s crisis on the eurozone and the global economy. But what’s clear is that financial markets are fearful – and if the situation deteriorates, central and eastern Europe will not be spared the impact. Poland and other currencies in the region have already been hit hard by a general risk selloff after euro zone policy-makers warned of contagion if the debt crisis was not stopped in Greece.

Opinion remains divided on the extent to which contagion could spread from southern Europe to central Europe. But in a move to limit potential fallout, Poland moved to extend a $20.5 billion flexible credit line with the IMF, in order to guard against attacks on the zloty.

PLUGGING THE GAP

But some Polish economists fear the government will use it as a way to make up the budget deficit, which has ballooned to 7.3% of GDP from 3.7% last year, according to the European Commission, despite economic growth.

“The fiscal deficit should be closer to 3%, and I would like to know how the finance minister is going to bring it down to that level,” says Wike Groenenberg, head of CEEMEA (central and eastern Europe, Middle East and Africa) strategy at Citigroup. “That said, some economists in Poland are too pessimistic about their government; the politicians are doing relatively well, in difficult circumstances.”

Since 2007, Poland has had a centrist, pro-European, market-orientated government dominated by the Civic Platform (PO) party.

It has performed admirably in steering infrastructure development in preparation for the Euro 2012 football tournament, Europe’s biggest sporting event. This entailed passing an act of parliament dedicated to ensuring UEFA, Europe’s soccer organization, got what it needed: a solution to Poland’s perennial red tape barriers, particularly in the transport and construction sectors.

The government has also pushed forward the privatization programme. In April, Poland’s largest insurer, PZU, raised $2.8 billion in Europe’s biggest IPO (initial public offering) for two years. Shares were priced at the top of the range, and orders from institutional investors were over four times higher than those offered, according to the government, which also said capital is fleeing from Greece to Poland.

Indeed, privatization could be the government’s ticket to plug its fiscal gap – with up to $10 billion estimated in the pipeline this year. But there are other reasons to be hopeful, especially regarding foreign investment. Warsaw has attracted new offices for Morgan Stanley, Goldman Sachs and Credit Suisse. And last summer, in the depths of the financial crisis, Ferrari opened a dealership in Warsaw.

Further long-term opportunities are being created in Poland’s petroleum sector. In December, prime ministerial energy security adviser Maciej Wozniak said Poland could become a net exporter of gas following technological precedents at shale fields in the US. Poland has had talks with Marathon, Chevron and ConocoPhillips about tapping an estimated 1.4 trillion cubic meters of shale gas, which could be worth some $240 billion overall.

While Hungarian, Ukrainian and the Baltic politicians have suffered in the polls, Poland’s government has maintained its popularity rating of around 50%. The administration has succeeded in reducing public-sector early retirement costs. It has demonstrated zero tolerance for sleaze, and jettisoned ministers associated with a gambling industry scandal.

Meanwhile, the late president Lech Kaczynski, of the opposition Law and Justice (PiS) party, had become known as “Mr Veto” – because of the idea that he would block any radical reform. The PiS are often referred to as nationalists, but another way to describe them might be as eurosceptic socialists. They are equally suspicious of a federal Europe as they are of unbridled free market capitalism. It is likely that President Kaczynski would have blocked bills that made life radically harder for Poland’s working class, but the government never produced the bills – and it is unlikely to do so until after the 2011 general election.

Some commentators are sceptical that Poland’s good fortune has anything to do with sound leadership by this government at all.

Krzysztof Rybinski, a professor at the Warsaw School of Economics and a former deputy governor of the National Bank of Poland, is scathing. “Finance minister [Jacek] Rostowski allowed for a deficit of over 7% when GDP growth was close to 2%. It is a clear example of a lack of fiscal responsibility,” he tells Emerging Markets. “The PO has been one of the most anti-reformist governments in Polish history.”

The Polish government is popular because of economic stability, but also because it hasn’t made life hard for the millions of public-sector employees who will suffer as Poland modernizes. The government hasn’t dared implement any radical structural reforms, even though it is riding high on economic stability. Some analysts believe that Rostowski could be squandering an opportunity – a view shared by many analysts.

NEXT STEPS

In the Polish system of government, power is concentrated in the hands of the prime minister, who invariably has to form a coalition government because of the proportional representation system of elections. The presidency is largely a symbolic role. But the president selects important officials and also wields a veto that can block reforms.

After the April 10 Smolensk air disaster, parliamentary speaker Bronislaw Komorowski automatically became acting president, in keeping with the Polish constitution. By coincidence, he is also the PO government’s candidate in presidential elections that were scheduled for the autumn. These have been brought forward to June 20, when he will face Jaroslaw Kaczynski – the identical twin brother of the late president.

“There is a good chance that Komorowski will be elected, and I see a gradual speeding up of reforms afterwards,” says Groenenberg. “Markets will react positively to such an outcome.” Polls indicate that Komorowski should win easily. He is seen as a reasonable, if dull, extension of the popular government, and would be expected to simply rubber-stamp bills backed by prime minister Donald Tusk.

He would also select a new central bank chief, an issue that Rybinski at the Warsaw School of Economics says is almost irrelevant. “When Slawomir Skrzypek was appointed he did not have the proper background and experience, but he proved to be an efficient administrator, and the National Bank of Poland did very well under him,” he says. “A better cooperation between government and president is welcome – but it’s not of critical importance.”

However, nothing is ever certain in Polish politics, and voter intention surveys are notoriously unreliable. Rural conservative church-goers – the bedrock of the Law and Justice party – literally walk from Mass to the polling booths. Civic Platform supporters have disproportionately failed to vote in the past. Moreover, the investigation into the Smolensk tragedy continues, and the outpouring of national sympathy may be of increasing benefit to Kaczynski.

If Kaczynski is elected, it is likely that he will block structural reforms for the next five years. If Komorowski wins, it is likely there will be a gradual acceleration of reform, but none of the necessary (and unpopular) social bills until after general elections in late 2011.

“There may be a reluctance by the government to attempt too much ahead of the elections in 2011,” says Groenenberg. “But if the government gets re-elected, then the major structural changes should take place, for example in the agriculture and health sectors.”

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