Interview: Piotr J Szpunar, Narodowy Bank Polski
Piotr J Szpunar joined Poland’s central bank, Narodowy Bank Polski, in 1995 and became deputy head of the macroeconomics department in 2002. In 2007, he was appointed head of the financial system department, and he now serves as advisor to Adam Glapiński, who replaced Marek Belka as governor in June. In this interview with GlobalCapital’s Phil Moore, Szpunar shares his thoughts on the prospects for Poland’s economy and monetary policy, as well as on the outlook for the banking system.
: With the economy continuing to grow at a healthy rate, have concerns about the risk of deflation receded?
In the first half of 2016 we saw a slight slowdown in economic growth, driven mostly by a fall in investment. We then had some disappointing short term data for July, but August was more promising, so we are maintaining our forecast for growth this year at 3.2%.
For 2017, our latest projection is 3.5%. This is in line with the IMF’s forecasts and is also very close to the potential output of the Polish economy, which is why we are confident that it will not generate any imbalances.
So far, we have not seen any significant adverse impact of deflation on the real sector of the economy. Consumption is growing at a healthy rate, supported by a vigorous labour market and the government’s 500+ child benefit programme. The situation in the labour market is very positive, with robust employment creation and falling unemployment. This fuels stronger wages, which have started to grow by more than 4% in nominal terms in recent quarters.
Rising consumption is helping to offset the slowdown in investment, mostly in the public sector. If you look more closely at the structure of the deceleration in investments, it is accounted for largely by local governments, which is closely related to the transition to the new EU funds perspective. We have completed several projects under the previous EU perspective, and the new perspective is now kicking in. So we are hopeful that by the end of this year or the first half of 2017, public sector investment will start growing again.
The Producer Price Index (PPI) has been negative for a long time, which may have had an impact on the corporate sector. But companies can compensate for falling sales prices through declining production costs driven by lower energy prices. Every quarter, we survey close to 2,000 large and medium-sized companies, and in recent surveys there have been very few complaints about falling prices, especially among exporters.
Unless there is another oil price shock, all indicators are now suggesting that inflation will turn positive by the end of this year.
: Will these growth and inflation numbers help to address income disparities between the east and west of Poland?
We don’t divide data on a regional basis, but factors such as the distribution of EU funds and the completion of large infrastructure projects are helping to reduce growth disparities. Income inequality is actually rather limited compared to some other countries.
Growth is very much in line with potential, and we see no imbalances that in the longer run could pose any risks to stable growth or financial stability. For example, we have no imbalances in the residential market. Although we have healthy growth in bank lending, we see no excessive credit growth. The current account is also in balance, which is a very significant structural change.
: Is it too early to judge what the impact of Brexit may be on the Polish economy?
It is very hard to predict the impact of Brexit, given that both its timing and the relations between the UK and the EU are highly uncertain and will depend on lengthy negotiations. For us, the final trade agreement between the EU and the UK is very important. UK is a significant and fast-growing market for Polish producers, and now accounts for about 6.5% of exports, so trade barriers would be negative for our exporters.
But Russia and the Ukraine used to account for 8% of exports, and this share has decreased significantly since the start of the Russian crisis, yet at the same time total Polish exports have significantly increased. Polish exporters are highly flexible and can harness new opportunities in the international market.
: Moving on to the Polish banking sector, what is the latest news on the conversion of Swiss franc mortgages?
My broad observation on the Polish banking sector is that it is highly stable. None of the Polish banks needed any public aid during the crisis, which is due to our very conservative banking model and effective supervisory regime.
Swiss franc mortgages are indeed a weakness for some banks. But not all Polish banks are exposed to this issue. People tend to compare this problem with the Hungarian one, which is a very different story.
We have stated many times in our financial stability reports that Swiss franc mortgages do not generate any systemic risks in Poland. Their volume is not tremendously high: about 8% of the assets of the banking sector. Polish banks stopped FX lending in 2011 in response to the recommendation of the FSA. Since then, as practically all new loans have been in Polish zlotys, there has only been stable amortisation of FX mortgages. Today, Swiss franc d mortgages are well below 40% of total mortgages in Poland and this share is being naturally reduced by growth in the banking sector and by regular amortisation.
Most borrowers service their debt efficiently. Monthly payments are not a problem, first because in accordance with recommendations issued by the supervisory authority as early as 2006, borrowers initially had quite high income buffers. These recommendations have proved an efficient way of managing credit risk, and despite three waves of FX shocks, banks’ mortgage portfolios remain healthy, with NPL ratios of just over 3%.
Second, since the peak of FX lending, nominal wages in zloty terms have increased by 30%-40%. This, together with falling interest rates in Switzerland and the floating rate formula for most of these loans, has relieved borrowers and helped to preserve the high quality of these portfolios.
The problem, however, is the LTVs. Some borrowers who have been servicing their repayments on a timely basis for many years still find they have to repay amounts that in zlotys are in some cases even more than they borrowed. This is why there have been a number of proposals for addressing this problem, including the idea that FX loans could be converted into zlotys using a rate somewhere between the historical and the current zloty-Swiss franc exchange rate.
This would be dangerous, because it would be very costly for some banks which were very active in that business. Such massive conversion would also result in significant pressure on the Polish currency. After some discussions and exchanges of views, the president has proposed that action is limited to making refunds only in cases where banks quoted excessive spreads to clients.
It has also been proposed that individual cases should be negotiated on a bilateral basis between banks and their customers. A dedicated working group has been established by the Financial Stability Committee (the macroprudential authority in Poland) to work on this kind of solution.
The story sounds complicated but is actually quite simple. This is that while we want to provide some relief for borrowers, our main objective has to be to maintain financial stability.
: What about the impact of the bank tax, which some observers have said may reduce the availability of credit and act as a drag on economic growth?
When the tax was implemented, we listed a couple of risks that we believed might arise from the introduction of the bank tax in our Financial Stability Report in February this year.
Six months after the introduction of the tax, the risks we identified have not materialised. To date, there has been no negative impact on credit growth, and demand for credit remains strong, with interest rates at a record low. Definitely, the introduction of the tax cannot be regarded as harmful to financial stability.
Our stress tests have demonstrated that Polish banks are robust. The industry has also withstood a number of shocks and remains profitable, with return on equity of about 8%.
The capital adequacy ratio of the banks is very high. It is in line with other European banks but the risk weighting is more conservative, so leverage is lower and there is more real loss-absorbing capacity. Liquidity is strong and the loan to deposit ratio is below 100%, so all the indicators in the industry are robust.
: Has monetary policy changed over the course of 2016?
The main principle of monetary policy in Poland remains the same, with the MPC observing a CPI target of 2.5%. Interest rates are set to attain both price stability and broader macroeconomic stability. The cost of anchoring inflation expectations was high at the end of the 1990s and the start of the 2000s, but now we are earning a premium from that investment.
: What is the NBP’s view on the recent weakening of the zloty?
Our view is that the Polish zloty is currently somewhat undervalued, which is obviously supporting exporters. But as we have a floating exchange rate regime we have no pre-set target or comfort zone for the level of the zloty, although its rate is one of the factors we take into account in monetary policy decision-making.
: Can you comment on fiscal policy and the outlook for debt?
We are still waiting for the draft budget for next year, which the MPC will comment on when it has been published. But this year’s figures show that the deficit over the first eight months has been one of the lowest in our history, with budget revenues up by more than 4% year-on-year. This has been driven by improved tax collection, supported by rising consumption in the real economy.
There has been a lot of talk about numerous costly government programmes, but basically there are two of these. The first is the 500+ initiative I mentioned earlier, which is a cost but is also considered an important investment which should support fertility in the longer term. Even if it does not help address Poland’s demographic challenge, it will help to eliminate large areas of poverty, which is an important contribution to balanced and inclusive growth.
The second is the proposed lowering of the retirement age, but no decision has yet been made on this, so we do not know what the impact on the budget will be.
: Finally, is euro adoption now off the agenda for the time being in Poland?
Firstly, there is no strong public support for adopting the euro. Secondly, there are constitutional hurdles that would have to be overcome if Poland were to apply to the eurozone. Thirdly, we are not in the ERM II, which is a euro adoption criterion. Additionally, the future of the euro area seems still uncertain. Things have improved since 2011 but there are still a number of challenges that need to be addressed in the eurozone. Above all, the question of integration without a common fiscal policy is still unresolved.