For Poland it is a case of in with the new and out with the old. After attaining formal EU membership last year the Polish government announced its plans in January for the early repayment of its debt to the Paris Club group of official creditors.
The e12.3 billion debt, a hangover from the country's financial troubles in the 1970s, matures between 2005 and 2009. Early repayment should save the country the high, often fixed-rate expenses that it incurs on the debt. The plan is to fund this early repayment by issuing sovereign bonds. This issuance is likely to be spread out over the next 12 to 18 months.
"We are the only OECD and EU member country that has outstanding Paris Club debt. It is important that we remove this legacy of the past," says Andrzej Ciopinski, deputy director of the foreign policy department at Poland's ministry of finance.
So far, Poland has completed Paris Club buyback negotiations with Germany, the UK, the Netherlands, Denmark and Finland. It has also reached a partial agreement with Canada. Talks with Spain, Sweden and the US are about to be completed and those with Switzerland should be finished by the end of June.
French talks
The most important discussions are with France – Poland's biggest creditor. The Poles are hopeful of agreeing early repayment by the end of the summer. If it does, Poland should have repaid about 60% of the Paris Club debt that was outstanding at the beginning of this year, leaving just e5 billion outstanding.
"We are still discussing the options with some creditor countries. We are keen to encourage them to participate in this pre-payment schedule," says Ciopinksi.
One of the rationales for this repayment is to allow Poland greater flexibility in its funding as it prepares for euro entry. "We were keen to reduce our overall refinancing risks and to create a longer debt maturity structure," says Ciopinski.
Another reason for the early repayment, he adds, is to avoid a repeat of the Russian experience, where Germany insisted on the securitization of part of its outstanding debt, taking debt repayments out of Russia's control. "It is possible that some or one of the creditors may have wanted to repeat this. It is better for us that the repayment takes place in the market on our terms," says the funding official.
Growth forecast
The macroeconomic fundamentals would seem to support the sovereign's additional funding requirements. Moody's Investor Services forecasts robust growth of 4.5% for this year. Core inflation will probably fall to about 2% from 4.3% in 2004.
Exports continue to be strong, boosting Poland's economic performance. "Poland has the fastest growing exports among the significant economies of the EU. I see no reason why export figures shouldn't increase by double digits this year and this will help economic growth," says Miroslaw Gronicki, the finance minister.
Domestic and foreign investments are also bolstering GDP. In particular there has been a significant increase in foreign direct investment (FDI). At the end of 2004 FDI inflows reached $7.8 billion, up from $6.4 billion at the end of 2003.
The government needs to focus on fiscal consolidation. "The key to Poland's rating lies in an improvement in fiscal performance," states a Moody's report in May. "Obvious target areas are rural pensions, health and education and social welfare transfers. Restructuring of some key heavy industrial sectors, an accelerated privatization process and improved labour markets would also boost economic efficiency."
Ciopinski acknowledges that the fiscal situation needs to be monitored closely, but says things are on track. "The response we got from our non-deal roadshow in the US [in April] was very positive. Fiscal issues were obviously of importance and the impression I got was that investors were satisfied with the answers provided by Finance Minister Gronicki." The minster has stated that he wants the budget deficit to fall to 3% of GDP in 2006, down from a 3.7% of GDP target this year.
The cloud on the horizon is that after 2007 the EU will not allow Poland to count pension payments as revenues. However, Gronicki remains upbeat. He says EU membership has had a significant, positive knock-on effect on the country's debt profile. "Since EU accession we have seen a completely different performance of the Polish financial markets. This has helped us to avoid the danger of passing the EU limit for debt-to-GDP (of 60% of GDP)."
Euro entry
The ground is also being prepared for formal euro entry. Analysts say the country's likely date for entry to the eurozone is 2009.
For now politics will dominate the headlines, as both presidential and parliamentary elections are due by the end of October.
Moody's predicts that a centre-right coalition will replace the centre-left government. The ratings agency adds that the new government will have its hands full. It says the new government's primary tasks will be to implement the structural reforms necessary to make the reduction of the large fiscal deficit less dependent on growth-induced revenue boosts or one-off privatization proceeds.
The government will also need to reduce social welfare benefits and deregulate labour markets to lower Poland's high unemployment rate, which, at about 19%, is the worst in Europe. Poland's negotiations with the Paris Club must also be successfully completed.