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Wednesday, August 09, 2006

Breaking the bank?

Are Poland's finances on the verge of unravelling?

Poland's finances seem to be going from bad to worse without Zyta Gilowska at the helm, though it's questionable as to whether she could have held up to the immense pressure from the populist elements of the governing coalition to spend public funds on everything from toddlers to tractor fuel. Since she's been gone however, the fiscal irresponsibility has become uncontrollable, with the Finance Ministry issuing a plethora of warnings that Poland won't be able to meet its budget commitments.

Budget blues

Yesterday, new Finance Minister Stanisław Kluza warned that Poland's budget deficit would exceed the 3% of GDP limit required by Europe's growth and stability pact by 2009 but would rather come in at 3.5%. This is important because the later Poland hits that target, the farther back Poland's entry into the euro zone will be pushed. Poland is still the only new EU member without a set target date for adopting the euro.

The government is having even more trouble than it expected covering this year's expenditures since all privatization activities have come to a virtual standstill. In today's Puls Biznesu, Deputy Treasury Minister Paweł Szałamacha revealed that privatization revenues for this year will equal around zł.1.2-1.5 billion – some four times less than last year.

Making up the difference

Without money flowing into the government's coffers from the sale of state assets, PiS had planned to make up the difference with dividends paid out from the profits state-owned companies. The state looked to collect a bumper crop of dividend payments this year, what with the banking sector (PKO BP), the oil sector (PKN Orlen), the IT sector (Prokom et. al), and the metals sector (KGHM – whose dividends the government forced higher, rather than allowing the investments the management wanted) all turning in fantastic profits. Unfortunately, with PKN Orlen's buyout of Mazeikiu for about zł.2 billion, the government is frantically trying to figure out where it will get the zł.530 million it had expected to squeeze out of Poland's largest company.

The government is now repositioning its rhetoric on the issue. Whereas earlier Treasury Minister Andrzej Jasiński had contended that "the" lost revenue from the slowdown in privatization would be made up by state-firm dividends, his deputy, Szałamacha, is now saying that the dividends will cover "part" of the lost income.

Where will the other "part" come from? We are left to presume that the state will simply take on more debt.

Ugly outlook

With continued unfettered state spending and wages being forced up due to the exodus of skilled workers, the złoty is bound to end its happy run of low inflation very soon. When that happens, Poland's biggest source of income – its exports – will slow significantly, and Poland will become less attractive as a low labor-cost investment destination. At that point the government will be forced to sell off state assets, now worth much less, since it will have hung onto them as long as possible, milking them of every last penny of profit. The deficit will continue to exceed 3% of GDP, keeping the euro – with its stability and trade-enhancing effects - far out of reach.


Blogger Gustav said...

This is germane:

13th July 2006

Polkomtel takes a loan in order to pay out dividends

From Poland A.M.

This Monday, the operator of the Plus and Sami Swoi mobile networks, Polkomtel is to pay out a record high dividend, which is to amount to zl.2.35 billion.

At the end of 2005 the telecom operator had only zl.158 million in cash. "We will acquire the funds needed to pay out the dividend, partially using the zl.1.6 billion credit the company had received recently from a bank consortium, but in majority it will come from operational revenues," said Polkomtel's financial director, Tomasz Wardak. However, analysts claim that the State Treasury is trying to pump out as much money out of the company in order to help cover the budget deficit. "Polkomtel is one of few profitable companies dependent on the State Treasury. This is tempting for the shareholders, but rather unbeneficial for the company," said Bankowy Dom Maklerski PKO BP's analyst, Dorota Puchlew. In the previous years the operator had a policy to earmark half of its annual profits for dividends.

8/09/2006 10:47:00 PM  

Blogger beatroot said...

But this government has no real commitment to Euro anyway, so prolonging its adoption is not really an issue.

Which of course brings us back to the stupidity of the 3% limit in the growth and stability pact in the first place. None of the large economies in the EU have managed to keep to it. France, Germany, Italy.

The UK, which has sensibly kept out of the Euro has not either.

But luckily for the Brits, it doesn’t have to and has retained its sovereign and political right to spend as much as it bloody well likes on whatever it bloody well likes, old chap.

The growth and stability pact is an ass. Period.

8/10/2006 11:07:00 AM  

Blogger Gustav said...

The growth and stability pact is useless, and you're right - this government has no intention of adopting the euro anytime soon.

But that doesn't mean euro adoption is not an issue. It's just not a political issue for this government. It still would be a good idea if Poland did it though.

Poland's economy is far different from Britains in that nearly the only thing inducing investors to pump money into Poland is its low labor costs, and in that Poland's biggest trade advantage is the cheapness of its products.

Both of those advantages will eventually disappear as Poland's economy modernizes, but with the Polish government spending like a drunken sailor and refusing to offset expenditures with the sale of state-owned firms, those advantages will disappear even faster.

When that happens, wouldn't it be good to have a currency like the euro - with stable interest rates and convenience for tourists and traders alike?

But instead of carefully planning for the eventuality of higher wages and less competitive exports by preparing the way for euro adoption, the government is making it much more difficult for Poland to ever adopt the euro in the medium to long-term, nevermind which political party is in power.

Britain's economy is altogether different, with all sorts of different investment and trade advantages.

So even if the EU were to scrap the growth and stability pact as part of the requirement for EU entry, by 2009, if things continue the way they are, it's hard to imagine Poland meeting any fiscal-responsibility qualifications.

And backward Poland will be left out in the cold.

8/10/2006 11:24:00 AM  

Blogger beatroot said...

UK economy is different - although one of its advantages is actually comparitivly low wages and easily sackable staff - a hang over from thr Thatcher glory days.

If Poland does adopt Euro - probable - then before that happens Brussels will have to do something about Growth and Stability pact, which was made - like the EU in general - for a much smaller 'common market' than we have now and will have.

3% is just too inflexible. And politically, the more Germans go over the top (as it were...was? did!) the more Euroskeptic wiesels - the usual suspects - will have ammo to bash the EU.


8/10/2006 12:40:00 PM  

Blogger Gustav said...

And again the double-standard of "Old" EU members to the "New" ones shows its ugly face. Earlier this year, the EU refused Lithuania entry into the euro zone next year because inflation there had hit 2.7 - one-tenth of a percentage point higher than the required 2.6 (the average of the three lowest inflation rates in the EU). If the calculations had been made according to euro zone members instead of all EU members, Lithuania would have passed easily. When joining the euro I beleive both France and Italy (though I'd have to check) broke this rule.

So there's another inflexible restriction that is flexible for the older EU members. Euro zone entry should be decided on less arbitrary figures. The whole system should be revised, and the G&S pact scrapped, I agree.

But no matter how you decide it, I still don't see Poland entering the euro zone without some more fiscal tightening in the near future.

8/10/2006 12:55:00 PM  

Blogger Gustav said...

22nd May 2006

Making an example of Lithuania

From Warsaw Business Journal

By refusing to allow Lithuania into the eurozone next year, the EC hopes to send a message to Poland and other new member states

The European Commission (EC) last week rejected Lithuania's bid to join the eurozone in 2007, due to the country's inflation rate rising 0.1 percent above the required figure. Lithuania had an average annual inflation rate of 2.7 percent in March, whereas the target for entry was 2.6 percent.

Economic and Monetary Affairs Commissioner Joaquin Almunia said Lithuania was being made an example to others. "If we are now, in our first opportunity to enlarge the eurozone, creating bad precedents, not enforcing the treaty in a transparent way ... how will we say 'No' to Hungary that has an eight-percent budget deficit?" Almunia told CNBC.

Experts agree that the refusal has little to do with Lithuania's economic situation, and is more of a warning to the larger new member states whose finances are in poorer shape, and whose entrance to the eurozone could have a much larger impact.

"The whole debate about Lithuania isn't about Lithuania. It's about Poland, the Czech Republic and Hungary," said Katinka Barysch, an economist at the Centre for European Reform.

The decision could attract claims of double standards within the EU, as many "old" EU members had to stretch the rules when the currency was introduced. Italy and Finland failed to meet a 24-month requirement to be in the stability-testing Exchange Rate Mechanism, and seven countries, including Germany, had too much debt.

EU Budget Commissioner Dalia Grybauskaite, a Lithuanian, called the decision on her country "accountancy dogmatism," saying the rules - designed in 1992, when the eurozone did not yet exist - were set down to support economic stability.

The reference value for eurozone entry is calculated using inflation data from the EU's - not the eurozone's - best inflation performers. In March, the three states with the lowest inflation rates included Poland and Sweden, neither of which is in the eurozone. If the calculations had been made using data from eurozone members only, as Vilnius argues should be the case, Lithuania would have fulfilled the criteria. Lithuania's inflation is a result of its rapid growth of more than six to seven percent, over three times the eurozone average.

"Lithuania is just not important enough to anybody," said Charles Robertson, chief economist for Eastern Europe at ING bank. "Purely looking at the facts they should be allowed in, but there is no political will."

8/10/2006 01:01:00 PM  

Blogger beatroot said...

still don't see Poland entering the euro zone without some more fiscal tightening in the near future.

Neither do the Kaczory, Lepper and Giertych...maybe that is the point.

8/10/2006 01:39:00 PM  

Blogger Gustav said...

You seem to suggest that they are actively trying to derail Poland's euro entry. Hmm - I wouldn't put it past Giertych, but I think they simply don't care. The point is that when they run Poland's finances into the ground they're going to need the euro. But by then it will be too late.

8/10/2006 02:11:00 PM  

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