(Updates with comment from interim German president on Greece in eighth paragraph.)
Feb. 17 (Bloomberg) -- Poland will have to take additional measures to consolidate public finances if it wants to cut the budget deficit to 3 percent of gross domestic product this year, Standard & Poor’s said.
The government’s current plans would narrow the shortfall to about 3.4 percent and to near the 3 percent mark in 2013, S&P analyst Leila Butt said in a Feb. 15 phone interview.
“We’re projecting a gradual fall in the fiscal deficit,” Butt said. “The government would need to take further measures if it wants to bring down the deficit more rapidly.”
Prime Minister Donald Tusk, the first incumbent government leader in Poland to win a second consecutive term since the collapse of communism 22 years ago, has pledged to increase levies, reduce tax incentives and cut pension privileges to narrow the deficit to within the European Union’s 3 percent limit and ensure public debt remains below a legal threshold of 55 percent of GDP.
The zloty slumped 11 percent against the euro last year as uncertainty over the future of the euro area deepened, increasing the level of Poland’s foreign-denominated debt. The extra yield that investors demand to hold Polish 10-year bonds over German same-maturity debt rose to 369 basis points yesterday, the highest this month. The currency has strengthened 6.3 percent this year.
Poland’s economy will expand 2 percent in 2012, according to S&P, compared with the government’s 2.5 percent forecast. Expansion will accelerate in the coming years “in line with higher growth in the euro region,” Butt said, reaching between 3 percent and 3.5 percent next year and “a bit higher” in 2014, she said.
Euro-area finance ministers are still debating how to solve Greece’s debt woes as a March 20 bond redemption date edges closer and recriminations flew between politicians in Greece and the northern European countries funding a 130 billion-euro ($170 billion) rescue package for the Mediterranean country.
Greece should exit the euro if it’s not willing or able to meet its pledges to cut spending, Horst Seehofer, who heads Germany’s Christian Social Union and became interim president today after the resignation of Christian Wulff, said in an interview with Spiegel magazine.
The budget gap was probably not more than 5.6 percent of GDP last year after reaching 7.8 percent in 2010, Finance Minister Jacek Rostowski said Feb. 15. The country will succeed in trimming this year’s shortfall to 3 percent if growth meets the government’s forecast, Jan Krzysztof Bielecki, who heads Tusk’s Council of Economic Advisers, said in a Feb. 14 interview, adding the estimate was “very conservative.”
The Polish currency strengthened to 4.1839 as of 12:53 p.m. in Warsaw from 4.2108 yesterday. The yield on the five-year bond maturing 2016 dropped to 4.989 percent, the lowest in almost four months.
Polish government measures to narrow the general government deficit total 40.7 billion zloty ($12.6 billion) or 2.6 percent of GDP in 2009-2012, the Finance Ministry said in an e-mailed response to questions last month. The figure includes savings made by pension-law changes that cut payroll contributions to privately managed pension funds, channeling the money instead into the state retirement system.
Drag on Consumption
“Internally, the government is tightening fiscal policy and that will weigh on household consumption,” Butt said. “Private consumption will very much depend on prospects for employment growth and wages as well.”
For S&P to consider raising Poland’s credit rating, the government would have to prove it is introducing the legal changes Tusk outlined after last October’s general election, Butt said.
“If the government presses ahead with structural reform and fiscal consolidation, we could revise the outlook to positive,” she said. “A change in our rating assessment really depends on what legislation is passed, and then very much on its implementation.” S&P has an A- rating on Polish debt, three notches below neighboring Czech Republic and four steps above Hungary.
Job growth at Polish companies employing more than nine workers slowed to 0.9 percent in January, Poland’s statistics office reported yesterday, the smallest increase since May 2010. According to S&P, there will be a drop in public spending after this year’s European soccer championships, to be held in Poland and Ukraine. An increase in private investment to make up the difference “is dependent on external factors,” Butt said.
“Poland has benefited from the fact that the economy is fairly broadly based and so less reliant on exports than the Czech Republic, for example,” Butt said. “All the same, there is a vulnerability coming from external factors, first and foremost the trade links with the euro region.”
Another potential danger for the Polish economy may be from its banks, S&P said. Western lenders, some of which are struggling to meet capital and liquidity requirements, control about 75 percent of eastern Europe’s financial industry.
“There is high foreign ownership of Polish banks, and there is a risk that if parent banks find themselves in a situation in which it’s hard to find liquidity, or they need to recapitalize, they may scale back in Poland,” Butt said. Still, she added, western banks will probably “keep exposure to Poland because it’s a dynamic economy and there are many opportunities still to be exploited.”
--With assistance from Dorota Bartyzel in Warsaw. Editors: Balazs Penz, Andrew Langley, Jeffrey Donovan
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