Euphoria short-lived for Poland's re-elected government

By bne IntelliNews October 13, 2011

bne -

The Polish government hasn't had long to revel in its historic return to power on October 9. Harsh economic realities are quickly crowding out any euphoria from the election as warnings over economic slowdown and the budget arrived from Moody's Investors Service and even its own advisors.

As bne has reported over the last month , concern was building in the run-up to the election that the ruling Civic Platform (PO) party was becoming complacent in its economic forecasts. And on October 11, Moody's moved to dispel any illusions investor might have, stating that the country's rating outlook may come under pressure unless the government presents "contingency plans" to reduce the budget deficit as economic growth slows amid the European debt crisis.

The government's plan to cut the deficit to 2.9% of GDP next year "might be out of reach," Jaime Reusche, an assistant vice president for sovereign risk at Moody's in New York was quoted by Bloomberg as saying. "Underestimating the risks of what is to come is dangerous, but policymakers in Poland are conscious about these challenges and the uncertainty that surrounds the operating environment. Nevertheless, we have not yet seen contingency plans by the government, and this could certainly impact the stable outlook."

Based on a forecast of 4% GDP growth, the government of Prime Minister Donald Tusk promised in its election campaign to cut the budget gap to below 3% of GDP next year after it widened to a record 7.9% in 2010. However, analysts worry that Europe's sovereign debt crisis could derail growth, especially considering the Polish economy's exposure to German manufacturing and other Eurozone exports.

The worries at the rating agency were reinforced by an interview given by Tusk's economic advisor Dariusz Filar, who called the deficit target "practically impossible" and suggested that the budget imbalance next year is more likely to approach this year's target of 5.6%. He added that the feared slowdown in the Eurozone could limit Polish growth to 2.5% at most.

Neil Shearing, chief emerging markets economist at Capital Economics, says that as things stand, he expects a budget deficit of 5% of GDP next year, which would push public debt to almost 58% of GDP - dangerously close to the level that would force dramatic fiscal tightening. "Either way, though, the key point is that far from being supportive, fiscal policy will now be a drag on growth. Indeed, the real risk is that debt ceilings force the government into self-defeating fiscal tightening, which exacerbates the economic slowdown, lowers tax revenues and ultimately widens the budget shortfall," he says in a note.

The upshot is that while Poland will continue to outperform its Central European neighbours, not least because it is a less open economy and is therefore less exposed to weaker euro-zone demand, the degree of outperformance is likely to be smaller than in 2008-09.

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