Interview: Piotr Nowak, Ministry of Finance
Having worked for a number of local and international companies in the financial services sector since 2004, Piotr Nowak was appointed undersecretary of state in Poland’s Ministry of Finance in December 2015. In this interview with GlobalCapital’s Phil Moore, he outlines his thoughts on Poland’s funding strategy and the outlook for the economy.
: What have been the main features of Poland’s strategy in the international capital market over the last 12 months?
Our strategy hasn’t changed much for several years. The domestic market remains the main source of financing. Foreign currencies have a supplementary role. They are used mainly to refinance foreign currency debt.
Obviously the euro is of primary importance. In the first half of the year we successfully placed euro and dollar trades. In August we printed Panda bonds as the first European sovereign. This was a landmark transaction for us. It was not a one-off trade — we plan to enter this market again, of course, if market conditions allow.
: What is Poland’s total funding requirement, what are the drivers of this, and how does the Ministry aim to break this up between the local and the international markets?
Domestic funding sources will maintain the predominant position. Our target is to use our strong primary dealership system to fuel the liquidity of that market.
Our attitude towards foreign currencies is opportunistic. In the medium term we aim at decreasing the share of foreign currency debt below 30%. Our borrowing plan for this year amounts to over Z180bn (£42bn). As we speak, more than 90% of this has been financed. Our needs for foreign currencies have been fully covered, so there is no pressure here to issue quickly. Of course, we don’t close any doors and we may take advantage of any window of opportunity on foreign markets.
: We asked this time last year what Poland had to do to get an upgrade. The question now is what does Poland have to do to get the recent rating actions reversed?
You’re right. The important thing here is that this year’s rating actions, not least the S&P downgrade, were not driven by fundamental issues. S&P downplayed our well-performing economy, strong labour market and robust banking sector, only considering changes in the political sphere in Poland, mostly legislative ones.
However, time has shown that these concerns about their potentially negative impact on the economy or public finances have not materialised. All we can do now is to focus on our work. There are some preliminary positive results, so I think it is only matter of time before rating agencies reverse their recent actions.
: What are the main features of the new government’s Responsible Development Plan? Is the IMF right to say that some of the policies in the plan have “dented investor confidence and could weaken growth going forward”? Can the government stick to election promises which would increase the budget deficit to over 3% on the one hand and keep rating agencies and investors happy at the same time?
The Responsible Development Plan is a platform for the development of a modern, competitive and balanced economy. It is based on five pillars, which include reindustrialisation, the development of innovative companies and foreign expansion, under which the government is proposing specific solutions.
There are several specific targets to be achieved by 2020, such as the growth of R&D expenditure and industrial production. We are at the early stages of the plan, and it will be some time before we see its full results. Nevertheless, its construction and proposed solutions bode really well.
The Polish government has stressed on many different occasions its commitment to keeping the general government deficit below 3% of GDP. Current works on tax compliance will improve the revenue side. We can see this improvement in the data for this year’s budget execution. They indicate robust growth in revenues and a lower than expected deficit. Based on that, we assume that tax collection will be even better next year, so we have much more space to introduce important measures, while of course observing the 3% limit.
: Public debt reached 51% of GDP in 2015. Given the fiscal risks identified by the rating agencies, do you expect this figure to fall in the coming year or two?
Public debt in Poland is safely below the 60% threshold and is much smaller than the figure for the EU as a whole. We have strong, legally binding fiscal rules that prevent public debt from exceeding safe levels. These rules assume automatically triggered prudential and remedial procedures if debt breaches 55% of GDP. We also have in place a stabilising expenditure rule that limits the growth of expenditure in the public finance sector. We are well equipped in terms of keeping a stable level of public debt.
: Over the longer term, do Poland’s demographics present serious fiscal challenges?
It is an undeniable fact that Europe — including Poland — is aging. However, in Poland we see a couple of factors that may mitigate the negative impact of demographics. An important initiative was the introduction of the ‘Family 500+’ programme. This provides a strong financial incentive to counteract demographic decline, as households should eventually decide to have more children.
On the other hand, the labour market itself will surely mitigate this risk. We have some space for raising the participation rate as we need to close the gap with more advanced economies. Additionally, growth of total factor productivity is among the highest in the EU, which can really prop up the economy in times of lower labour supply. Also, we should not forget about the impact of massive immigration from Ukraine.
: How have Polish spreads performed versus Germany over the last year or so, and what is the outlook for spreads?
Central bank policies have really distorted yield curves around the world. Spreads versus Germany are strongly influenced by the policy of the ECB. Yields of our domestic bonds have stayed roughly unchanged. Our 10 year euro bonds currently trade at 70bp over Bunds, 10bp lower than a year ago. So spreads have narrowed somewhat during the last 12 months and are currently rather stable.
: Where does Poland sit as a credit? Is it an emerging or a developed market? Can you generate price tension between the two investor bases and is there any stigma associated with being part of emerging market indices?
Nowadays investors seem to be much more focused on economic fundamentals and other specific characteristics of a credit. They require precise data and spend more resources digging deeper. That’s why we do our best to keep them well informed about our current situation and prospects for the future. Nevertheless, being on the radars of a wide array of investors is something I would not complain about.
: How has Poland’s investor base evolved over the last 12 months? How much demand do you get from Asia and the US? How if at all has Poland’s investor relations strategy evolved?
Over the last 12 months the share of non-residents in our local currency bonds has decreased to slightly over 34%, a result of strong demand from domestic banks. Foreign investors have been selling the short end of the curve and buying medium and long term bonds. I think this proves investors believe in the strength of our credit.
The structure of our foreign investor base is very well diversified, with a dominant role played by real money investors such as asset managers, central banks and sovereign wealth funds. Geographically, similar chunks go to Asia, the eurozone and North America. What we have seen over the last couple of quarters is a rising share of Asian accounts, and this may be growing further after our latest issuance in the Chinese onshore market.
The statistics prove that our investor relations strategy works quite well. It hasn’t changed a lot compared to previous years. We try to maintain a close relationship with all the major accounts. We meet them frequently at the Ministry’s premises and visit them around the world. Additionally, we prepare several publications to keep them up-to-date with our economic situation and developments on our financial market.
: What were the Panda bond’s objectives and were they all met?
The Panda bond was a new experience for us. We put a lot of effort into the documentation process, to make sure we prepared it thoroughly. We chose Bank of China as a bank with the most local experience and HSBC as an international one, but with a strong footprint in China. Both banks had good experience of debut Panda bonds issued by other sovereigns.
The meetings we had in China in May and June gave us a lot of confidence that our offering would be well received. And at the end of the day the demand was very high. The pricing worked well for us, because a negative yield on an after-swap basis is the dream of every debt manager. However, the priority for us was to diversify our investor base. We believe this trade bodes well for the participation of Chinese investors in our domestic bond market.
: In the past Poland has also issued in currencies such as yen and Swiss francs. How does Poland make use of opportunities in non-core currencies?
Our strategy of remaining focused on the domestic market doesn’t mean we close all other doors. We watch the situation closely and try to find interesting opportunities. This is how we identified the opportunity in the Panda bond market. So you may see us issuing in non-core or exotic markets. But the main funding source will still be the Polish zloty market, followed by euros and/or US dollars.
: What are the latest developments in the domestic bond market? What impact have changes in the pension fund sector had on supply and demand?
Both external and internal factors have taken their toll. The policies of major central banks have had the biggest influence. On the domestic front one particular uncertainty factor was crucial — the Swiss franc mortgages issue. But it has been largely mitigated by the new draft law presented by the President’s office, which is much more modest in scope than the original proposal.
Poland’s sound economic prospects, as well as the commitment of the government to keep the deficit below the 3% threshold, serve as an anchor when it comes to the fiscal outlook for the public finance sector, which, I believe, will alleviate the concerns raised by some of the rating agencies. On the primary market, we have seen stable demand, with an average bid-to-cover ratio of 1.6 since the beginning of the year. This has allowed us to finance over 90% of this year’s borrowing requirements and build a safe liquidity buffer.