Poland Banks on Privatizations to Plug Budget

Europe's best performing economy is counting on a wave of privatizations to counter a growing budget deficit. But what if the markets don't play along?

By Marynia Kruk

Poland is emerging as one of the stars of this gloomy year. It looks set to be the only country in the European Union to record economic growth for the full year, and its GDP hasn't contracted year-on-year in any quarter for the past 14 years, according to the Polish statistics office – an admirable accomplishment.

Still, the Polish government will be walking a tightrope next year when it comes to its state budget and is counting on revenue from an ambitious privatization plan to plug a ballooning budget deficit. The economy continues to grow, but at a much slower pace, down from 6.8 percent in 2007, according to Eurostat, to 1 percent in 2009, according to IMF and Finance Ministry forecasts. And although most analysts agree this is the year the economy bottomed out, growth is expected just to edge up in 2010, not immediately bounce back to boom-time levels.

Rising unemployment has caused tax revenues to fall while increasing demand for social benefits, leaving Poland with a budget deficit that is set to double next year to 52.2 billion zlotys (12.5 billion euros), from 27.2 billion zlotys in 2009.

Most governments faced with this situation would either raise taxes or cut spending, but Poland's president, Lech Kaczynski, who is the twin brother of Jaroslaw Kaczynski, the country's main opposition leader, has warned that he will veto any tax hikes or spending cuts. Privatization, which is not subject to presidential approval, is an elegant way for Poland's ruling Civic Platform party to circumvent the president in addressing the budget deficit problem.

Most of Poland's economy has already been privatized. Since the country began its transition to capitalism in 1990, it has sold off many state-owned companies to strategic investors. Telecom monopoly TPSA was sold to France Telecom (FTE), and a handful of foreign banks have controlling stakes in the main Polish commercial banks, save for one, PKO Bank Polski (PKOB.WA). Poland has also listed many companies on the Warsaw Stock Exchange, including its crude oil refineries and natural gas distributor, while holding on to majority stakes in them.

The ambitious plan for 2009 and 2010 foresees selling off most of the chemical-fertilizer sector, electricity utilities, a big stake in the country's copper miner KGHM (KGHM.WA), as well as the Warsaw Stock Exchange itself. Poland's Treasury has said it is aiming to raise 12 billion zlotys (2.9 billion euros) this year and 25 billion zlotys in 2010 from the sales.

But analysts and economists doubt whether the Treasury, which is the caretaker of state-controlled companies and in charge of privatization, can pull this off. The goal for 2010 would top the historic peak, 20 billion zlotys raised in 2000, another year of a widening budget deficit.

"It will be hard," said Piotr Kalisz, chief economist at Citi Handlowy bank in Warsaw. "The 2010 goal is more ambitious than 2000, and back then there were many more companies to sell and market conditions were better."

Kalisz added that, historically, actual privatization revenues have always come in below each treasurer's ambitious goals.

And this time, there is a shortage of interested bidders, whether due to a lack of credit or the fact that some of the companies for sale are just plain unappealing at the price tags and sale deadlines set by the Treasury.

For example, foreign electricity utility groups – the potential investors for the bulk of what Poland is selling – are reviewing their own assets and making divestments, not acquisitions, analysts said.

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