Poland seeks investment cash to battle crisis

By bne IntelliNews October 15, 2012

Tim Gosling in Prague -

With the Eurozone crisis making up sudden and rapid ground on Poland's economy, the government announced a set of plans to boost slowing GDP growth on October 12. The trick is to find cash to pump into the country's infrastructure push without worsening the state's precarious finances.

Ahead of a 233-219 victory in a confidence vote called by the government to bolster its economic policy, Polish Prime Minister Donald Tusk announced that a new infrastructure fund - backed by state assets - is to be set up. The plan is designed to pump investment into the country to stimulate growth without provoking the state's stretched fiscal position. Meanwhile, banking authorities are set to unveil plans to boost lending next week.

"There is no other way for Poland than sustaining growth through investments," Tusk told parliament in a speech, reports Reuters. "Poland has a real chance to defend economic growth and make it translate into more jobs."

The PM outlined a list of road, rail, power and gas infrastructure projects totalling around PLN220bn, although the majority were announced in earlier government programmes. "All of these projects have to be safe from the point of view of the deficit," Tusk reiterated, according to the Financial Times.

Officials say that state assets will be transferred to an off-budget fund named Polish Investments, which be administered by state-owned bank BGK. "According to calculations... we should create leverage for investments and credits worth around PLN40bn to 2015, and around PLM90bn if we count over six years," Tusk said, according to Reuters. The key to the plan is to attract private funds to power the projects, and therefore the growth, because the government is in no position to do so.

State limits

Warsaw is pushing hard to hit ambitious fiscal targets, and scrabbling for every cent in order to keep the budget deficit below 3% this year. It has also pledged to reduce state debt from a current level of around 54% of GDP. Even without that promise however, a constitutional ceiling of 60% means the government has little leeway to boost the economy directly. Under the plan, the guarantees would be held in a non-state vehicle, and so would not be classified as debt.

The idea of a "guarantee fund" to push infrastructure investment was first discussed in public in early October. As bne reported, Polish officials had to push the plan, modelled on funds already in operation in Brazil and South Korea which use state-controlled assets to guarantee private sector investment, past objections from some quarters of the government - possibly the Ministry of Treasury, which currently holds state company stakes. Officials from the treasury said on October 13 that it could accelerate the privatisation drive ahead of handing state assets over to BGK.

"The fund could be injected with about PLN10bn (€2.4bn) worth of assets of companies such as KGHM, PKO, Lotos or PKN, which, thanks to financial leverage, could yield as much as in PLN50bn to be used as guarantees," one source said at the time. "This could be a major boost for the weakening economy," another source claimed. "The idea behind the fund was finding a way to get a huge infrastructure programme going to support growth, the labour market and the troubled construction sector without burdening the state-coffers, debt and deficit."

The added bonus of the scheme is that it will power Warsaw's grand plans to continue to upgrade the country's infrastructure and increase energy security via the addition of huge volumes of generation capacity and development of its shale gas reserves. On top of that, many of the country's largest construction groups are in the financial mire, which threatens to slow bank lending due to the PLN60bn they owe. A large infrastructure push would, therefore, improve the prospects of Polish builders.

Poland sprang out of the blocks in 2012 as it looked to strong domestic demand to help it evade the fallout of the Eurozone crisis. However, although the country is still likely to outperform the vast majority of its EU peers, the brakes have slammed on since the first quarter, as consumers shrink back in the face of high unemployment and demand for exports out of the Eurozone dry up. The National Bank of Poland (NBU), which is expected to cut rates significantly before the end of the year, now forecasts 2013 economic expansion at just 2.1%, compared with the 4% achieved last year. Erste analysts expect growth of 2.4% in 2012.

Following on from Tusk, Finance Minister Jacek Rostowski said the NBU and financial regulator KNF are working on plans to encourage bank lending to add further stimulus to the economy. "The central bank governor told me that he will present plans on how the bank plans to battle the crisis next week," Rostowski told the lower house. "The head of the banking regulator will present his proposals on Monday."

NBU Governor Marek Belka has said banking authorities will soon soften loan regulations to make it easier for Poles to take out credit. Belka is now also thought to be almost certain to offer a rate cut at its November meeting after becoming the only central banker in the EU to raise rates this year with a 50-basis-point hike in May.

Treasury to accelerate privatisation?

The following day, treasury officials discussed the finer points of the planned fund, suggesting it may accelerate its privatisation drive for 2013 ahead of handing the stakes it holds in several Polish state giants over to BGK.

Deputy Treasury Minister Pawel Tamborski said that although the planned Polish Investments fund does not change the original target to raise PLN5bn from privatisation in 2013, the pace of state asset sales next year could accelerate. "Market demand for big offers is still robust," Tamborski said, according to Dow Jones, despite the current struggle to hit the 2012 target of PLN10bn. The official pointed out that the treasury currently holds stakes in listed companies worth PLN97bn, and noted that BGK will be in charge of privatization from 2014 onwards.

Tamorski's boss, Treasury Minister Mikolaj Budzanowski, spoke following the announcement of Polish Investments to reiterate that Warsaw will maintain operational control in the country's blue chips, wherever the stakes are held. "If we talk about assets that are key from the point of view of the state, where we made a decision to keep control, in energy companies and at a level guaranteeing [control], we'll keep it," Budzanowski told reporters. "Everything that's beyond that will be turned into cash. It will be the driving force of our investments."

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