Poland a winner and loser at the same time

By bne IntelliNews August 17, 2009

Jan Cienski in Warsaw -

Poland's economy looks set to be the best performer in the EU this year, narrowly avoiding an outright recession, but that hasn't been enough to prevent the country from falling into deep budget trouble and killing off hopes of speedily joining the euro. The unveiling August 11 of a rapid privatisaton plan is the government's attempted fix.

Ludwik Kotecki, the deputy finance minister, recently told the Polish senate that the plans to join the common currency by 2012 were going to have to revamped, saying that Poland was in "a completely different macroeconomic situation than that which was forecast last autumn."

That was when Prime Minister Donald Tusk made the surprise announcement that Poland would join the euro by 2012. The government stuck to that pledge throughout the worst of the crisis earlier this year, when the zloty plunged against the euro and the dollar, ratings agencies feared for the stability of the Polish banking sector, and most analysts forecast the economy entering a recession this year.

In many ways the mantra of being on course to join the euro, although unrealistic, did serve a purpose during that nervous time by helping to differentiate Poland from its more crisis-stricken neighbours like Hungary and Latvia in the eyes of foreign investors. But now that the immediate danger has receded, it has become obvious that Poland simply does not meet the Maastricht criteria for countries to join the euro. At the moment, Poland only meets one criterion, for interest rates.

Budget blues

The biggest problem is with the budget. Poland is already facing a European Commission excessive deficit procedure for running a general government deficit of 3.9% last year, more than the allowed 3.0%, and the situation is only going to get worse.

The European Commission expects Poland's general government deficit will come to 6.6% of GDP this year and rise to 7.3% in 2010. Government debt was 47% of GDP last year, and Kotecki says it could top 50% this year and be above 55% next year, which would set off legal triggers to force the budget back into balance.

As Poland's economy has slowed, the tax take has dropped while spending has increased. For this year, the government is hoping to plug part of that hole by squeezing state controlled companies for dividends on the profits they made in 2008, which was still a fairly good year for the economy. Some of those attempts to extract cash have proven to be very controversial, especially the push to get PKO BP, the state-owned bank that is the country's largest, to pay out almost all of last year's profits as a dividend, which aroused the ire of banking regulators and the central bank. Efforts by the finance ministry to get the central bank to pay out some of its profits as well were also rebuffed by the bank.

There are few other sources of ready money. Lech Kaczynski, the president, and a rival of PM Tusk, has said he would veto any tax increases. That is forcing the government to raise funds by selling off state assets. A newly approved programme on August 11 calls for such sales to bring in PLN36.7bn (€8.8bn) by the end of next year. The government is being quite careful to sell off only uncontroversial minority stakes in long privatised companies, and to limit the sale of shares of state-controlled companies like copper miner KGHM and power generators PGE and Tauron to levels that do not endanger that control.

The hope is to stabilise public finances, after which time the government can again plan for joining the euro. "There will be correction to the [euro] roadmap this autumn," said Michal Boni, Tusk's economic policy advisor, in a recent television interview.

How big a "correction" remains to be seen.

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