Bloomberg News

Polish Premier Faces Budget Challenge After Election Win

October 10, 2011

(Adds results from 99.5 percent of precincts in second paragraph, comment in fourth, updates zloty, bonds from fifth.)

Oct. 10 (Bloomberg) -- Polish Prime Minister Donald Tusk, who won yesterday’s general election, must focus on cutting the budget gap to reverse a zloty plunge as investors shy away from the European Union’s biggest eastern country.

Tusk’s Civic Platform is set to win 206 seats in the 460- seat parliament after getting 39 percent of the vote, based on results from 99.5 percent of precincts reporting, the Electoral Commission said today. The Peasants Party, Tusk’s coalition partner for the last four years, would take 28 seats with 8.4 percent support, giving the two parties a majority.

The government pledged to narrow the deficit to 2.9 percent of gross domestic product next year, counting on 4 percent economic growth to boost revenue. Slowing economic growth and the euro region’s debt crisis may derail the plan unless the government takes “more drastic” measures, Fitch Ratings said today.

“The incoming Polish government needs to reassess the country’s fiscal consolidation plan in light of slower growth if Poland wants to remain on target to meet the” criteria for euro adoption, Jeremy Carter, managing director at Fitch Ratings, said in a statement from London today.

Zloty, Bonds Gain

The zloty traded at a three-week high of 4.315 per euro at 1:30 p.m. in Warsaw. The currency has slumped about 9.5 percent against the euro this year as investors shy away from emerging markets on concern Europe’s debt crisis will slow growth.

Polish bonds rallied with a yield on a benchmark 10-year note falling. The yield on bonds maturing on October 2021 dropped 11 basis points to 5.63 percent.

A Tusk win may help bolster confidence in Poland’s ability to deal with potential spillover from the euro area’s debt crisis, according to Anders Svendsen, chief economist at Nordea Bank in Copenhagen.

“The PO victory and the lower risk of a messy coalition should be good news to the markets,” Svendsen said in an e- mailed note. “The zloty is likely to strengthen on the news that the Platform won the elections and that a three-party coalition seems to have been avoided.”

The Platform’s main rival, Law & Justice, is set for 157 seats after winning 30 percent of the vote, returning as the largest opposition party, the Commission said.

Greatest Challenge

Controlling public finances will be the greatest challenge for the administration that emerges from today’s election, Jan Amrit Poser, chief economist at Bank Sarasin, said at a conference in Warsaw on Oct. 7. The general government deficit soared to 7.9 percent of GDP in 2010, exceeding the EU’s 3 percent limit for a third consecutive year.

The International Monetary Fund is forecasting 3 percent growth and Citigroup Inc. is predicting a 1.9 percent expansion in Poland, the only member of the 27-nation EU to avoid recession during the global financial crisis.

The budget deficit soared to 7.9 percent of GDP last year and public debt is near the threshold of 55 percent of GDP, a level that would trigger mandatory austerity measures.

The zloty’s pre-election tumble sent local-currency government bonds down 15.7 percent in dollar terms last quarter, the third-worst returns worldwide after Greece and Hungary, according to indexes of debt due in more than one year compiled by the European Federation of Financial Analyst Societies and Bloomberg.

‘Twice as Hard’

“The next government will have to work twice as hard as in the previous four years since the country faces even bigger challenges,” Tusk told a celebrating crowd of supporters at the party’s campaign headquarters yesterday.

President Bronislaw Komorowski must designate a new prime minister within 14 days of dismissing the outgoing government. The prime minister then has 14 days to present this new cabinet’s program to parliament and win a confidence motion with at least 231 votes in the lower chamber.

The Peasants Party is “the most proven and credible” ally for the next government, Presidential Minister Slawomir Nowak said on private radio station RMF today. The Peasants Party will give “serious consideration” to its coalition options as the results present several possible scenarios, its leader Waldemar Pawlak said yesterday.

Palikot, Democratic Left

Two other parties won enough support to exceed the 5 percent threshold to gain seats in parliament. The Palikot Movement, founded by former ruling-party politician Janusz Palikot, received 10 percent of the vote, which would give it 40 seats, and the Democratic Left Alliance won 8.3 percent of the vote, or 27 seats, according to the preliminary results.

Palikot, a former vodka distiller, clashed with Tusk last year. He urges a quicker overhaul of public finances by cutting spending on bureaucracy, the Catholic church and pensions.

Poland, a country of 38 million people, was the biggest net recipient of EU funding in the bloc’s 2007-2013 budget, getting 67 billion euros ($97 billion) in aid to iron out differences between richer and poorer states.

The funding, which helped the Polish economy grow 4.4 percent a year in 2007-2010, may be cut if the country doesn’t reduce its deficit to within the EU limit of 3 percent of GDP next year from 7.9 percent in 2010.

‘Being Boring’

The EU aid has added an average of 1.5 percentage points to economic growth each year, according to Poland’s Regional Development Ministry, and remains essential for economic expansion as budget cuts may limit consumer demand and public investment.

Tusk may be the first Polish prime minister to be returned to power since the fall of communism in 1989. According to Andrew Michta, head of the German Marshall Fund’s Warsaw office, that shows the Poles have matured politically over the last two decades.

“If the numbers hold, this is in my book a vote for continuity,” he said. “I guess there is something to be said about being ‘boring’ in the case of Poland.”

--With assistance from Wojciech Moskwa in Warsaw. Editors: Balazs Penz, James M. Gomez

To contact the reporters on this story: Katya Andrusz in Warsaw at kandrusz@bloomberg.net; Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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