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Poland
The Polish economy showed its resilience during the crisis. The country posted solid growth, thanks in particular to
vigorous domestic demand, bolstered by an accommodating fiscal policy. Poland is now entering a period of adjustment:
against a backdrop of still-flagging external demand, the necessary consolidation of public finances will add to the
slowdown in activity. This situation is likely to favour a fall in inflation and a decline in the current account deficit.
Nevertheless, this decrease will be only gradual, which will not leave monetary policy much room for manoeuvre
Gear changing
Robust macroeconomic climate during the crisis
Since the beginning of the crisis, Poland has stood out from other European
Union countries by virtue of its sustained growth (chart 1). Even in 2009, for
example, while the rest of Europe was in recession, Poland’s GDP continued to
increase, up 1.6%, which only signalled a slowdown from previous years. A solid
recovery followed, with growth of 3.9% in 2010 and 4.3% in 2011. All in all,
between 2008 and 2011, cumulative growth has been 15.7%. This resilience of
the Polish economy in a disrupted global environment is largely due to the
diversification of its activities while domestic demand has held up, thus
dampening the effects of exogenous shocks. The large size of the Polish market
(population of 38.2 million) has worked in favour of this equilibrium.
In this respect, especially in comparison with the Czech Republic or Slovakia,
Poland is only moderately open in terms of foreign trade: the degree of
openness, defined as the sum of exports and imports as a percentage of GDP,
was 92% in Poland in 2011, compared with 153% in the Czech Republic and
181% in Slovakia. Poland also has a structural trade deficit. This declined
markedly in 2009 under the combined effect of a sharp slowdown in domestic
demand and the depreciation of the zloty – so much so that net exports were the
primary factor underpinning growth then. However, since 2010, domestic
demand has returned to being the main driver of the recovery. Household
consumption was sustained by a modest rebound in employment and wages in
2010 and a decline in the savings rate in 2011, despite a persistently high
unemployment rate (around 12%). Private sector investment picked up late, in
early 2011, sustained by a revival of credit to corporates.
Belated tightening of fiscal policy
The counter-cyclical fiscal policy conducted since late 2008 therefore appears to
have contributed to keeping domestic demand afloat. Government consumption
was more vigorous than household consumption. Above all, public investment
increased at a very sustained pace: its weight in investment carried out by
economic entities with more than 49 staff increased from 24% in 2007 to 34% in
2010 and 31% in 2011 (chart 2). This investment was directed in particular
towards infrastructure, and especially roads, but also towards sports
infrastructure with a view to co-hosting the European football championship this
year. It should also be noted that a significant proportion of Poland’s
infrastructure financing comes from European funds (EUR 67.3 billion, i.e. the
equivalent each year of around 3% of GDP, has been allotted to Poland for the
period 2007-2013).
This active support of the economy was made possible by the good health of
Poland’s public finances on the eve of the crisis (chart 3): in 2007, the fiscal
deficit was only 1.9% of GDP. It then started to widen in 2008, reaching 7.8% of
GDP in 2010. Consequently, the public debt increased rapidly, rising from 45%
of GDP to 55% (under European accounting methods). Yet the Polish
constitution prohibits the public debt (measured this time according to a national
definition1) from exceeding the threshold of 55% of GDP, failing which corrective
measures will have to be taken. Upon nearing this level, the government began
to re-orientate its fiscal policy in 2011, in particular by increasing VAT and
restricting access to early retirement. It also partially abandoned its 1999
pension reform, curbing the extent of the shift to private pension funds. As the
parliamentary elections were being held in October 2011, however, fiscal
consolidation measures were limited: the fiscal deficit was 5.2% of GDP and the
debt did not stabilise. After the election, Donald Tusk was re-appointed as Prime
Minister and took the helm of a coalition formed by his party, Civic Platform (PO,
centre-left) and the Polish People’s Party (PSL). Structural measures were
announced in November and are likely to be gradually implemented, among
which the elimination of some advantages for certain pension categories and,
above all, the introduction of a golden rule with the intention to lower the fiscal
deficit to 1% of GDP.
Slowdown in sight
With the inevitable fiscal tightening underway, Poland does therefore not have
the leeway it had in 2008 and 2009 to confront the slowdown in activity in
Europe. More than one-quarter of Polish exports are sent to Germany, but to a
large degree these products are used as inputs in the export sectors. Poland
may therefore undergo a renewed slowdown in its exports over the coming
quarters, which could hamper investment. A contraction in domestic demand is
all the more likely in that credit supply is vulnerable to a possible withdrawal,
even if only very partial, by foreign banks, which are exposed to liquidity strains
and hold 72% of banking assets. All in all, growth could therefore be around
2.5% in 2012, which would remain the best result among Central and Eastern
European countries.
This slowdown will certainly assist the gradual reduction in some imbalances.
Inflation was high in 2011 (4.3% in average, which is much higher than the
official 2.5% objective), but this was largely due to temporary factors, such as
the VAT hike in January 2011 and, of course, energy and commodity food prices
(chart 4). In fact, core inflation was only 2.4%. In this context, the key policy rate,
which had remained unchanged at 3.5% since June 2009, was lifted to 4.5%
over the course of the first half of 2011; it has remained stable since. Inflation is
expected to subside over the next few months: it could average 3.7% this year,
and 2.6% in 2013. Against this backdrop, an easing of monetary policy would
blunt the pro-cyclical effect of a fiscal tightening.
Nevertheless, monetary policy is left with little room for manoeuvre, as it is
subject to many constraints. A cut in key policy rates should go with a
depreciation of the zloty, which would indeed provide a boost to exports.
However, it would also, at least in the short term, be harmful as regards external
imbalances (chart 5). The current-account deficit reached 6.6% of GDP in 2008
and has only partially decreased since: it was still 4.1% of GDP in 2011.
Besides, this deficit has only been partially financed by non-debt-generating
capital, in such a way that Poland remains dependent on portfolio investments,
which depend on the credibility of the policy mix. This external fragility is
mitigated by the flexibility of the exchange rate, the size of the foreign exchange
reserves (USD 94 billion at end-2011, covering 4.4 months of imports) and also
by the Flexible Credit Line granted by the IMF as a precautionary measure. In
addition, this credit line was extended by two years in January 2011 and
increased to USD 29.5 billion. Regardless, a marked depreciation of the zloty
would weigh on the solvency of households, insofar as 60% of mortgage loans
are denominated in foreign currency (of which 80% in Swiss francs).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Poland
The Polish economy showed its resilience during the crisis. The country posted solid growth, thanks in particular to
vigorous domestic demand, bolstered by an accommodating fiscal policy. Poland is now entering a period of adjustment:
against a backdrop of still-flagging external demand, the necessary consolidation of public finances will add to the
slowdown in activity. This situation is likely to favour a fall in inflation and a decline in the current account deficit.
Nevertheless, this decrease will be only gradual, which will not leave monetary policy much room for manoeuvre
Gear changing
Robust macroeconomic climate during the crisis
Since the beginning of the crisis, Poland has stood out from other European
Union countries by virtue of its sustained growth (chart 1). Even in 2009, for
example, while the rest of Europe was in recession, Poland’s GDP continued to
increase, up 1.6%, which only signalled a slowdown from previous years. A solid
recovery followed, with growth of 3.9% in 2010 and 4.3% in 2011. All in all,
between 2008 and 2011, cumulative growth has been 15.7%. This resilience of
the Polish economy in a disrupted global environment is largely due to the
diversification of its activities while domestic demand has held up, thus
dampening the effects of exogenous shocks. The large size of the Polish market
(population of 38.2 million) has worked in favour of this equilibrium.
In this respect, especially in comparison with the Czech Republic or Slovakia,
Poland is only moderately open in terms of foreign trade: the degree of
openness, defined as the sum of exports and imports as a percentage of GDP,
was 92% in Poland in 2011, compared with 153% in the Czech Republic and
181% in Slovakia. Poland also has a structural trade deficit. This declined
markedly in 2009 under the combined effect of a sharp slowdown in domestic
demand and the depreciation of the zloty – so much so that net exports were the
primary factor underpinning growth then. However, since 2010, domestic
demand has returned to being the main driver of the recovery. Household
consumption was sustained by a modest rebound in employment and wages in
2010 and a decline in the savings rate in 2011, despite a persistently high
unemployment rate (around 12%). Private sector investment picked up late, in
early 2011, sustained by a revival of credit to corporates.
Belated tightening of fiscal policy
The counter-cyclical fiscal policy conducted since late 2008 therefore appears to
have contributed to keeping domestic demand afloat. Government consumption
was more vigorous than household consumption. Above all, public investment
increased at a very sustained pace: its weight in investment carried out by
economic entities with more than 49 staff increased from 24% in 2007 to 34% in
2010 and 31% in 2011 (chart 2). This investment was directed in particular
towards infrastructure, and especially roads, but also towards sports
infrastructure with a view to co-hosting the European football championship this
year. It should also be noted that a significant proportion of Poland’s
infrastructure financing comes from European funds (EUR 67.3 billion, i.e. the
equivalent each year of around 3% of GDP, has been allotted to Poland for the
period 2007-2013).
This active support of the economy was made possible by the good health of
Poland’s public finances on the eve of the crisis (chart 3): in 2007, the fiscal
deficit was only 1.9% of GDP. It then started to widen in 2008, reaching 7.8% of
GDP in 2010. Consequently, the public debt increased rapidly, rising from 45%
of GDP to 55% (under European accounting methods). Yet the Polish
constitution prohibits the public debt (measured this time according to a national
definition1) from exceeding the threshold of 55% of GDP, failing which corrective
measures will have to be taken. Upon nearing this level, the government began
to re-orientate its fiscal policy in 2011, in particular by increasing VAT and
restricting access to early retirement. It also partially abandoned its 1999
pension reform, curbing the extent of the shift to private pension funds. As the
parliamentary elections were being held in October 2011, however, fiscal
consolidation measures were limited: the fiscal deficit was 5.2% of GDP and the
debt did not stabilise. After the election, Donald Tusk was re-appointed as Prime
Minister and took the helm of a coalition formed by his party, Civic Platform (PO,
centre-left) and the Polish People’s Party (PSL). Structural measures were
announced in November and are likely to be gradually implemented, among
which the elimination of some advantages for certain pension categories and,
above all, the introduction of a golden rule with the intention to lower the fiscal
deficit to 1% of GDP.
Slowdown in sight
With the inevitable fiscal tightening underway, Poland does therefore not have
the leeway it had in 2008 and 2009 to confront the slowdown in activity in
Europe. More than one-quarter of Polish exports are sent to Germany, but to a
large degree these products are used as inputs in the export sectors. Poland
may therefore undergo a renewed slowdown in its exports over the coming
quarters, which could hamper investment. A contraction in domestic demand is
all the more likely in that credit supply is vulnerable to a possible withdrawal,
even if only very partial, by foreign banks, which are exposed to liquidity strains
and hold 72% of banking assets. All in all, growth could therefore be around
2.5% in 2012, which would remain the best result among Central and Eastern
European countries.
This slowdown will certainly assist the gradual reduction in some imbalances.
Inflation was high in 2011 (4.3% in average, which is much higher than the
official 2.5% objective), but this was largely due to temporary factors, such as
the VAT hike in January 2011 and, of course, energy and commodity food prices
(chart 4). In fact, core inflation was only 2.4%. In this context, the key policy rate,
which had remained unchanged at 3.5% since June 2009, was lifted to 4.5%
over the course of the first half of 2011; it has remained stable since. Inflation is
expected to subside over the next few months: it could average 3.7% this year,
and 2.6% in 2013. Against this backdrop, an easing of monetary policy would
blunt the pro-cyclical effect of a fiscal tightening.
Nevertheless, monetary policy is left with little room for manoeuvre, as it is
subject to many constraints. A cut in key policy rates should go with a
depreciation of the zloty, which would indeed provide a boost to exports.
However, it would also, at least in the short term, be harmful as regards external
imbalances (chart 5). The current-account deficit reached 6.6% of GDP in 2008
and has only partially decreased since: it was still 4.1% of GDP in 2011.
Besides, this deficit has only been partially financed by non-debt-generating
capital, in such a way that Poland remains dependent on portfolio investments,
which depend on the credibility of the policy mix. This external fragility is
mitigated by the flexibility of the exchange rate, the size of the foreign exchange
reserves (USD 94 billion at end-2011, covering 4.4 months of imports) and also
by the Flexible Credit Line granted by the IMF as a precautionary measure. In
addition, this credit line was extended by two years in January 2011 and
increased to USD 29.5 billion. Regardless, a marked depreciation of the zloty
would weigh on the solvency of households, insofar as 60% of mortgage loans
are denominated in foreign currency (of which 80% in Swiss francs).
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