Not only did Poland escape recession, it also managed to bring down its budget deficit and has the most developed debt market in central and eastern Europe
Poland is the one EU country to have escaped recession since the financial crisis first hit and has continued to outperform its neighbours since the sovereign debt crisis hit the eurozone.
Many analysts believe that the Polish finance minister, Jacek Rostowski, can take credit for the country’s outperformance. In fact David Hauner, head of EEMEA economics and fixed income strategy at BofA Merrill Lynch, says Rostowski had provided a model for how his western European neighbours should have acted.
He says Rostowski deserved credit for the way in which he had reduced the deficit. “He did it consistently and in a way that coordinated discretionary measures and through growth to bring down the deficit over time,” Hauner says.
Rostowksi, who took over as finance minister in 2007, has also delivered a major pension reform that, while clearly not popular, was carried out well, Hauner says. “He has not resorted to any measures that undermined confidence, and that can be seen as a credit to the finance minister.”
Michael Ganske, head of emerging markets research at Commerzbank, also endorsed Rostowski. “The Polish performed well because they handled debt management well,” he says. “He timed it well and used the opportunities offered by the markets for refinancing.”
In 2011 Poland cuts its fiscal deficit to €18.9 billion or 5.1% of GDP from €27.8 billion or 7.8% in 2010 on the back of buoyant tax collections and consolidation measures. Last year Rostowski instituted pensions reform, raised value added tax by one percentage point, abolished VAT reimbursement for company cars and pushed through changes in excise duty regulations, which together were worth 1.3% of GDP.
On the expenditure side the government cut spending on active labour market policies, imposed a nominal freeze in public-sector wages and reformed pensions, measures which had a cumulative impact of 1.1% of GDP.
The European Commission expects that Poland will cut its fiscal deficit to around 3% of GDP on the back of further revenue reforms worth 1.3% of GDP and spending cuts amounting to 0.5% of GDP. “Public finances have improved significantly,” it said in a staff working paper published in May.
Rostowski was able to take advantage of good market conditions to fund 80% of Poland’s financing needs for this year in the first half of this year. As Manfred Burdis, head of debt capital markets origination at Austrian bank Erste, tells Emerging Markets: “The domestic Polish capital markets are probably the most developed in the region.”
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During the four years of the crisis up to this year, Poland was the fastest-growing country in the EU, the whole of Europe and the OECD, Rostowski tells Emerging Markets. “If we look at the first four years [of the crisis], our growth was almost twice as high as that of the second-fastest growing country in the EU, Slovakia. So it’s quite something to be pleased about.”
While at the same time stimulating some areas of its economy, Poland actually tightened fiscal policy at the beginning of 2009. The country cut expenditure and raised revenue to the budget when most other states, after the shock caused by the collapse of Lehman Brothers, were engaged in fiscal expansion, and this boosted investors’ confidence. In 2012 Poland took advantage of the growth seen in 2011 to achieve fast fiscal consolidation, one of the top four fastest in the EU, according to Rostowski. “Definitely the most important reason for growth in this period was suitably timed macroeconomic policy,” he says.
The second factor that helped the country was a very strong banking system, which was not affected by the Lehman collapse. “After Lehman, there was a banking crisis. Poland was not at risk from a banking crisis because it had a very well capitalized and very healthy banking system,” says the finance minister.
“The third point in terms of fundamental strength was the high share of public investment of GDP, focusing the funds that we got from the EU on investment projects more than our neighbours in the region, and I think that paid off.”
All those factors – a flexible economy, a strong banking system, a flexible exchange rate and access to EU funds – were true to some extent in many of Poland’s neighbours in central and eastern Europe, but none of them performed as well. “The answer to why that was the case I think comes back to properly calibrated and properly timed macroeconomic policy. Doing the right thing at the right time, combining growth and austerity in the right order, in the right proportions at the right time,” Rostowski says.
Analysts have warned that Poland’s debt as a percentage of GDP has increased, and the country will not be able to stimulate its economy by cutting taxes or boosting government expenditure if the economy slows down.
“I don’t think we need fiscal stimulus at this stage at all,” says Rostowski. “We achieved major consolidation, and we’re in a strong position. We’ve had a slowdown this year, which we predicted fairly accurately in our budget for 2012, and we’re predicting a slight further slowdown next year.”
But, he adds: “We see no reason to be particularly pessimistic about next year.”
Following the ECB’s promise to buy three-year government bonds of troubled eurozone members and the German constitutional court’s nod for the ESM rescue fund, the threat of a spillover of the crisis to emerging Europe has receded, says Rostowski.
“We expect, on the back of stabilization in Europe, to be able in a natural way – the way we did in 2010 and 2011 – to return to growth, which for us is moderate but for Europe is fast,” he says. But this is likely to happen “in 2014 or 2015, not in 2013”.