CE Financial Observer: The Economist was extremely critical when commenting on the latest political changes in Poland. Do you think that Poland is still an interesting place for investors?
Marek Belka: The Economist dealt with political issues and not with economic ones, so let’s focus on the latter. The first thing that the new government has to face is that the 2016 budget has to absorb its spending initiatives. At the same time, the government has to keep the budget deficit within limits. So far it’s too early to say how it will look, and I’m not going to take any position before the Monetary Policy Council produces its regular opinion, as it does every year.
Without getting into details the budget itself seems to be presentable, the deficit is under control, but the devil is in the details. The spending limit was increased by PLN 16 bn and the key question is how to find the corresponding amount on the revenue side.
We have some tax initiatives, a modest increase of the budget deficit, and a promise to increase the effectiveness of tax collection. This is probably the most contentious part of the budget, so we will have to look at it a bit more closely.
That was a long introduction to an answer – I hope nothing fundamental has changed in the Polish economy that would indicate a loss of trust and confidence among foreign investors.
Do you think Poland can afford to implement all the promises made by Law and Justice during the election campaign?
It depends whether there will be sequencing in their implementation.
Some of the promises can be introduced in such a way as to be almost neutral to the budget. One example is the “zero tax bracket” and I strongly recommend such a solution. Anyway, let’s see how the 2016 budget will perform and then we will see what comes next.
Until now Poland has been perceived as one of the most stable economies in Europe.
No, you are wrong. Poland is one of the most stable and balanced economies in Europe.
The ECB has lowered interest rates to deal with deflation. Meanwhile, the US is raising its rates for the first time in almost 10 years. It seems as though there are fears of turmoil in the region and among the countries surrounding Poland, as well as its major partners. Some foreign investors may decide to withdraw from the CE region.
I don’t think Poland is extremely fragile. Yes, a lot is going on in the global economy as far as diverging monetary policy in the US and in the Eurozone is concerned.
First let’s have a look at the US. Poland has never “benefit” from excessive inflow of capital. If there was no excessive inflow, then there can’t be an excessive outflow. If you look at the absolute numbers of non-resident holdings of Polish securities it has been very stable for the last few years, so I don’t see a problem. With further loosening of monetary policy in the Eurozone, the ECB would probably mitigate any negative impact resulting from a tightening of US monetary policy. It may result in a volatility of currencies, including the Polish złoty, in coming years, but we have to remember that the złoty is strictly connected with the euro because our major economic relations are with the European economies. A lot depends on the situation on global monetary markets and how the European economy develops. We are also not immune to the changes in China, although we are not connected directly but rather indirectly through the European economies.
But let me be clear – what is happening in Poland with the Polish złoty, interest rates and Polish securities depends to a large extend also on internal factors. If we overdo the budget then Polish securities will suffer, as well as the Polish currency.
In view what you have just said what should be the monetary policy of the NBP in the nearest future?
I think the best thing is to continue the current monetary policy. The level of interest rates seems to be close to optimal. The economy keeps growing at a decent rate and should continue growing at this rate for a year or so. We have stable depositor behaviour. I always stress that this is something we should take into account when thinking of potential interest rate reductions. Deflation, which is clearly annoying us to certain extent, even if it is beyond our sphere of impact, will decrease, I hope.
But of course it depends on the economic situation, how business evolves and also on the preferences of new members of the Monetary Policy Council.
In one of its reports McKinsey said Poland should do five things to achieve the standard of living of Western countries – closing the productivity gap by raising the efficiency and value of Polish products and services, creating additional investment projects and securing capital of up to PLN 2 trillion for financing, increasing innovation in the economy, reversing the negative demographic trend in the labour market and enable further growth of businesses and improve the level of public services. The new government sees the role of NBP as a more active player in some of these areas. Is it possible? And if yes, how?
I think there was too much excitement about some of the statements made during the election campaign. The issue of central bank independence doesn’t exist. Nobody is planning to discuss the matter of central bank independence or changing its mandate. In fact, the NBP has all the instruments necessary to actively influence the economy.
If the climate for business is improved, private investments will probably pick up. If state institutions are more effective then public investments will grow. In the case of Poland part of the success in the field of public investment depends on how efficiently it absorbs EU structural funds.
But Poland doesn’t have a problem of lack of money. Banks have too much money, private companies have record amounts of accumulated cash, so the question is not really about how to finance but how to stimulate and trigger investments. How do we make Poland more attractive to both foreign and domestic investors?
If the situation changes and banks would be short of liquidity then there is a possibility for the NBP to act more vigorously and more dynamically by providing liquidity. What the ECB is doing now we said we would do in 2008. At the outbreak of the financial crisis we created a “confidence package”. It offered longer-term liquidity to banks. Almost nobody was interested. Of course now the situation is much better, and we observe a reasonable amount of the liquidity on the market.
So there is a lot of noise, some excitement, but really there is nothing unusual going on. Let the government stimulate investment demand that would be good for the economy.
When looking at the banking sector liquidity may become a problem, and not the only one. The bankruptcy of SK Bank was the first one in many years. Do you think that in general the Polish banking system is stable and safe? Banks are already complaining that they had to contribute additional amounts to the Bank Guarantee Fund. On top of these amount there is a proposed assets’ tax and possible changes in the mortgages denominated in Swiss francs. All this can have a significant impact on banks’ capital adequacy ratio.
Yes, it’s not really about liquidity, it’s all about capital. If we take into account all these potential burdens some banks will need an injection of capital and their ability to increase credit activity will be either drastically diminished or even some deleveraging could take place.
Let’s look at the last issue you have mentioned – mortgages denominated in Swiss francs. I think the government is fully aware this cannot be implemented simultaneously with the tax on banks’ assets. So it’s an either-or. If you want to impose the tax on assets, which is almost a sure thing, then you should at least postpone if not forget the Swiss franc denominated mortgages. Doing the latter is my recommendation.
More and more often Central European countries, such as Poland, Hungary Czech Republic and Slovakia, are not called emerging markets. The new name - “fast growing economies” - is used to describe this region. Do you think that these four countries are - let’s say - almost mature markets?
It depends what you mean by mature. Certainly these four countries are not typical emerging markets. They share some weaknesses with the highly developed, advanced economies, i.e. poor demography. And they are tightly integrated with the European economy.
What differentiates us from the Western Europe is competitiveness. All four are still low cost countries, as well as being less innovative and having less developed high technology sectors. These countries are mature, maybe quite affluent but not advanced countries.
Putting aside politics, the Russian economy is in jeopardy. Not only because of the sanctions and low oil prices but also due to a lack of reforms. It is one of the major partners not only for Eastern Europe but also for other European countries. What should Russia do from the economic point of view to get back on the growth path?
This is a problem of the Russian economy in a nutshell: its present troubles are not exclusively due to the low oil prices but also to a failure to modernise, to diversify from commodities exports.
Being rich in commodities can be seen as a blessing but it is also a curse. When you depend on commodity exports your currency tends to appreciate if commodity prices are high. It’s called the “Dutch disease” and it kills production and is a big obstacle to diversification.
Russia’s problem is how to diversify away from commodities as the main source of exports and encourage other exports, as well as how to substitute imported consumer goods with domestic ones. From this point of view the weakening of the rouble is something that should be seen as a positive change because it enables many sectors to regain a share of the Russian market.
Crisis is one thing but “business climate” is another. Poland went through a harsh adjustment in the early 1990s. State-owned companies were deprived of state subsidies and shrank, leaving market space for new private businesses. Poland has probably forgotten about it but the difficulties experienced by state-owned enterprises released resources - manpower, competent managers, and to some extent machinery, but most importantly a market for new ventures. It was not painless but in this way Poland has introduced a vibrant entrepreneurial class and a vibrant entrepreneurial sector.
That never happened in Russia. Even foreign businesses there concentrate on commodities and not on manufacturing. Of course there are notable exceptions but this is a general rule.
Narodowy Bank Polski and National Bank of Ukraine established a PLN/UAH currency swap line of USD1bn. Why was such decision taken, what exactly it means and is there a risk it would be misused?
It's an agreement about an exchange of currencies. Ukraine will provide an agreed amount of UAH in exchange for an agreed amount of PLN. Polish złoty is a convertible currency and it can be exchanged on the market so the swap line will allow Ukraine to replenish its reserves which is very important for the stability of the country.
Poland wants to strengthen Ukrainian efforts to stabilise its monetary policy, hryvnia, and a financial sector, which - as a matter of fact - is happening. Similar agreements were signed with Sweden and China, and some other countries are also considering it.
Just to make it clear - we are not spending Poland's reserves, we are exporting Polish stability to Ukraine by providing the possibility to exchange złoty into whatever currency Ukraine wants like EUR or USD. Poland is offering a very deep vast market.
Of course there are some risks including the obvious one such as the exchange rate. Hryvnia can weaken but without revealing the details I can assure you that it's well hedged and Poland is very well protected against this risk.
Another risk is the misuse of the funds. The swap line can be activated only if the IMF's reform program is fully implemented. If it's not then Poland can simply stop or suspend the swap line.
The NBU’s objective is to replenish its foreign reserves. Theoretically foreign reserves can be used for an intervention on the currency market. But part of the IMF's program states that NBU is not allowed to freely intervene on the currency market without prior consultations with the IMF. Or simply without IMF's consent.
Ukraine is reforming and we are observing efforts of the Ukrainian authorities, including the NBU, in reforming the banking system. It will take some time till banks resume normal credit activities, but they are on the right path.
And what is really important for Poland is a stable Ukrainian economy.
And last but not least, and this is only a theoretical discussion – why should Poland join the Eurozone? Theoretical because the ruling party in Poland is opposed to the introduction of the euro and it seems that Poland will not join in the foreseeable future.
I have always advised that we should not rush to the Eurozone. I’m against giving any accession dates, as well as any assurances that we shall never join. But in all discussions Polish accession to the Eurozone should not be treated as a political issue even if it is one. Here, in the NBP we should look at it without emotions. I personally think that so far there are more problems with the Eurozone than with Poland. (Maria Bnińska)
The article is an edited version ofr an interview which appeared on Central European Financial Observer:
