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?
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. It doesn't help that Poland's power market is regulated, and the government-appointed power chief has refused to approve power companies' requests for price hikes.
The Civic Platform party must tread carefully for fear of accusations by the opposition that it is selling off the country's "crown jewels." The preferred method for government sales of companies – an initial public offering on the Warsaw Stock Exchange, a popular method because it is deemed more transparent – is harder to bring to completion nowadays. A year after the Lehman Brothers collapse, investors are getting back their appetite for riskier emerging market assets, but their hunger is nowhere near pre-Lehman levels.
For now government officials have not offered a Plan B in case Poland does not hit its privatization revenue target and is forced to make painful choices.
"If they don't hit the goal, the government will have to borrow more money," Kalisz of Citigroup (C) said. "Then government debt rises above 55 percent of gross domestic product in 2010, which triggers legally set obligations to balance the budget, which in turn equals spending cuts and taxes."
Although citizens wouldn't experience the cuts and higher taxes until 2012, the balanced budget draft for that year would be widely discussed in the approach to parliamentary elections in the fall of 2011 and opposition leaders would make sure voters knew what painful consequences were in store for them, Mateusz Szczurek, chief economist at ING Bank Slaski (SLAS.WA), said.
Treasury spokesman Maciej Wewior, in tune with the Finance Ministry's optimistic forecasts, said he expects the pace of asset sales to accelerate toward the end of this year. Privatization revenue for 2009 has reached 4.1 billion zlotys as of 7 October, he said, slightly over a third of the target for the year.
"Earlier this year, our advisers told us to wait until later in the year for the markets to calm down," Wewior said. "Now the market is calmer, now is the time."
He added that so far easiest to sell have been small, rump stakes of below 5 percent in companies privatized in the previous round.
"The stock market is liquid," he said.
Some analysts said the government is always left with the option of fiddling with the law that mandates the 55 percent of GDP cap on debt.
"That would be a bad idea," said Szczurek of ING. "It makes the government look bad and lowers Poland's credibility among those who buy Polish Treasury bonds. It would raise Poland's cost of borrowing – a short-sighted solution."
Privatization will be an important process to watch even if it is only partially successful, as it will affect the exchange rate of Poland's currency. The zloty weakened dramatically following the collapse of Lehman Brothers from its peak at 3.20 against the euro in August 2008 to about 4.85 in February of this year. It has recovered only somewhat to about 4.20 now.
As the government proceeds to sell companies, foreign investors will have to convert their dollars or euros for zlotys in order to pay the government in Poland's currency or buy the companies' shares on the stock exchange, thus boosting the zloty.
"The transactions most likely to be zloty positive are privatizations involving share listings/IPOs, pulling in a wider spectrum of foreign investors, with small but numerous foreign currency inflows that are more likely to be converted into zloty on the open market rather than at the central bank," Koon Chow, an analyst at Barclays Capital (BCS), wrote in a research note.
That could trigger a virtuous circle for the Finance Ministry, as a stronger zloty lowers the value of Poland's debt denominated in euros, dollars, and yen, bringing down its ratio to GDP and perhaps keeping it below that key 55 percent threshold.
"And if GDP grows fast, that also lowers the key ratio," Szczurek said.
THE PRIVATIZATION MENU
Warsaw Stock Exchange Treasury has approved four exchanges, Nasdaq OMX (NDAQ), NYSE Euronext (NYX), Deutsche Boerse (DB1Gn.DE), and the London Stock Exchange (LSE.L), to make bids for a majority stake in the Warsaw Stock Exchange by the end of October. It has also approved six banks and brokerages, which can bid for small stakes of less than 5 percent.
PGE In its planned debut on the WSE in 2009, electricity group PGE will issue new shares totaling a 15 percent stake in the company. Once it is a publicly listed company, the Treasury will likely sell a minority stake on the WSE.
Enea Power company Enea (ENAE.WA) debuted on the WSE in 2008. At that time, Sweden's Vattenfall took a 17 percent stake in the company. However, Vattenfall backed away from making a bid for the rest of the company and the Treasury is waiting for German rival RWE (RWEG.DE) to make a call for Enea's remaining shares.
Tauron The Treasury plans to sell its shares in the power company in an IPO in 2010. Tauron will also issue new shares during its debut.
Energa The Treasury plans to sell an 85 percent stake in Energa to a strategic investor and reserve 15 percent to give to employees.
KGHM The mining and smelting company is already partially privatized; the Treasury holds only a 42 percent stake. The ministry has said it plans to sell more shares, up to a 10 percent stake, through the WSE in 2010.
PZU Following the settlement of a nearly decade-long dispute between Poland and Dutch insurer Eureko over control of Polish insurer PZU, the company will debut on the WSE in 2010. The Treasury and Eureko will sell a 4.9 percent and a 15 percent stake, respectively.
Lotos The Treasury currently holds a 68 percent stake in fuel refiner Lotos (LTOS.WA), but plans to sell it down to the point where it still remains above 50 percent.