Polish Finance Minister Jacek Rostowski said the premium his government pays on debt relative to the neighboring Czech Republic may disappear over the next four years as he strives to keep the economy out of recession in the face of monetary policy that he deems too strict.
“There is no reason why we should be paying a penny more on our bonds than the Czechs,” he said in a May 22 interview in Warsaw. “It’s not so long ago that Poland was considered less trustworthy than Hungary, not to speak of the number of some other countries. Today, we’re seen as very much stronger. I think that process will continue until we reach more or less parity, or maybe a little bit better, than the Czech Republic.”
Rostowski, 62, is trying to preserve Poland’s status as the only European Union member to avoid a recession since the global financial crisis was unleashed in 2008. While the country currently pays 3.45 percent to borrow for 10 years, that compares with the 1.67 percent paid by the Czech Republic even after the Polish economy has grown faster every year since 2007.
Polish government bonds returned 29 percent in the past three years, compared with 17 percent for German debt and 13.5 percent for U.S. debt, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. They earned 14.6 percent in the past 12 months and 3.2 percent this year, beating both German and U.S. bonds, the indexes showed.
London-born Rostowski, a former dean of the economics department at Central European University in Budapest, has controlled the country’s finances since 2007. As an adviser to ex-Finance Minister Leszek Balcerowicz and the Russian government in the early 1990s, he had a courtside seat as the former communist countries set out to transform their centrally planned economies.
He was able to draw on that experience to guide Poland to uninterrupted growth, which helped push unemployment to 10.7 percent, compared with the euro-region average of 12.1 percent, from a peak of 20.3 percent in 2002.
As the longest-serving Polish finance minister since the end of communism in 1989, Rostowski is now facing pressure to keep the economy out of recession as two opinion polls this month showed Prime Minister Donald Tusk’s Civic Platform party behind the opposition Law and Justice for the first time since 2007, with elections scheduled for 2015.
The government cut the budget deficit to 3.9 percent of economic output last year from 7.9 percent, which gives the central bank room to move its main interest rate closer to the European Central Bank’s benchmark of 0.5 percent from the current level of 3 percent, Rostowski said.
“One thing that has gone wrong is monetary policy, which has been dramatically behind the curve compared with other countries.” he said. “This fiscal-deficit tightening has put a lot of downward pressure on inflation, leaving a great deal of space for the Monetary Policy Council to reduce real interest rates appropriately. They haven’t done it.”
Poland’s real interest rate, which adjusts for inflation, is 2.2 percent, according to data compiled by Bloomberg. The Czech Republic’s real rate is minus 1.65 percent and Germany (EURR002W)’s is minus 0.6 percent.
The Narodowy Bank Polski has cut the main interest rate by 175 basis points since November to a record-low 3 percent as the European Union’s largest eastern economy heads into its deepest slowdown in more than a decade. The reductions started six months after the bank became the only one in the EU to raise borrowing costs last year.
The International Monetary Fund last week urged policy makers led by Governor Marek Belka to lower borrowing costs further “without delay” as the euro area’s longest-ever recession curbs demand for Polish exports. They also predicted growth will slow to 1.2 percent this year, matching the weakest pace since 2001, according to data compiled by Bloomberg.
Unlike their Polish counterparts, Czech central bankers cut the main rate to 0.05 percent last year and are considering other tools such as currency sales to revive growth. So far they’ve failed to lift the economy from its longest recession since at least 1996.
The urgency of rate cuts was more muted in Poland, where the economy hasn’t contracted in a single quarter since the last three months of 2008. That also helped the government curb the budget deficit by half in relation to economic output in three years. Rostowski is now banking on 105 billion-euro ($136 billion) in EU funds over the next seven years to help accelerate growth.
“We’ve managed to tighten the structural deficit by almost six percentage points of GDP through growth,” he said. “I’m sure public investment will help economic growth as we go into the new EU budget perspective next year. We’re way ahead of the curve in preparations for that and expect the money to start flowing on the similar scale to 2009.”
The government is also planning to heed the IMF’s advice to tolerate budget revenue falling short of its target as a result of a slower economy instead of trying to squeeze the deficit further and risk stifling growth.
“Our policy over the last two-three years has been to reduce the structural fiscal deficit and take advantage of growth to reduce the actual fiscal deficit,” Rostowski said. “In the current situation we may actually want to carry on reducing the structural balance while allowing automatic stabilizers to work.”
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