Economic crisis finally hits Poland

A string of dreary statistics this week shows that the once-booming economy has started to sputter: manufacturing fell significantly at the end of last year, unemployment shot up and officials are finally admitting that Poland is hurting.

Poland "will not be an island resistant to trends outside its borders," Prime Minister Donald acknowledged Tuesday as he announced a plan to seek budget savings this year to cover a likely shortfall in state revenues.

For months, Poland's leaders and economists insisted the country could avoid the global turmoil thanks to its healthy banking sector and low mortgage and consumer debt levels.

Shoppers kept spending at the gleaming new malls that have mushroomed in recent years across Poland — by far the largest of 10 formerly communist countries that have joined the European Union in recent years.
But the days of denial have now passed.

"Everybody is worrying," said Maja Goettig, chief economist for BPH Bank in Warsaw. "The outlook is worsening each month, and the question is how big this slowdown will be. We've just entered it — and nobody knows when it will end."

The economy that grew at a brisk 6.7 percent in 2007 — swelling the ranks of a middle class with money to spend on fine wines, fancy cars and large homes — slowed to a still-healthy 4.8 percent in 2008, according to figures released by the government's Central Statistical Office Thursday.

Data released this week have shown that Poland felt a chill toward the end of the year as the global crisis hit the country's western European neighbors and the United States. Unemployment rose in December for the second straight month, reaching 9.5 percent — due in part to a slowdown in the manufacturing sector as foreign orders fall.

Industrial production in November fell 8.9 percent over the previous year; data released Tuesday showed another 4.4 percent year-on-year fall in December.

The same day, the central bank cut interest rates by a hefty three-quarters of a percentage point for the second consecutive month. It cited a "stronger than previously expected economic slowdown" in cutting its benchmark rate to 4.25 percent
As worries deepen, Poland's zloty has depreciated significantly in recent months against major currencies like the euro and the U.S. dollar.

The question now is how bad things will get. Many experts still believe Poland can weather the storm better than other European countries and manage modest growth in 2009, although it exports heavily to countries already in recession.

Goettig says her bank predicts 2 percent growth for now, but expects to revise that downward to zero growth. Tusk, the prime minister, said the government's "pessimistic" scenario is for 1.7 percent growth.

Another source of instability comes from the fact that many of the Poles who bought homes in recent years took out mortgages in Swiss francs. Now that the zloty has declined, some are finding it harder to repay their loans.

Despite the souring mood, there are some reasons for optimism.

Polish banks are tightly regulated and were never burdened by the toxic assets that have brought down financial institutions elsewhere. Economy Minister Waldemar Pawlak says Polish banks, mostly owned by large Western European banks, are often in a much better situation than their parent companies.

And bucking the larger trend, retail sales in December grew 6.6 percent over the same month in 2007, better than experts expected.

However, the state statistics office said this week that consumer confidence is now falling.

Agata Lagan, who runs a string of high-end clothing shops throughout Poland, attests to that. She said December sales fell by 30 percent in her Lilla Moda shops in Warsaw year on year.

Another factor weighing on profits is that the battered zloty has made it more expensive to import the goods.

"Usually when we have a new collection, the shops are full of customers ready to shop on the first and second days," she said. But when a new collection arrived two weeks ago, the crowd was less than half the usual size.

"Everyone is waiting for discounts," she said.

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Azerbaijan energy partner to Poland

Poland supports the Azeri drive to join European nations as a reliable and diverse energy partner, Poland's Ambassador to Azerbaijan Kshishtof Krayevski said.

Krayevski said in an interview with Azeri news agency Today.Az that 2008 was a significant year for strengthening relations between Warsaw and Baku, noting the participation of Polish President Lech Kaczynski at a major energy summit in Baku in November.

"We always support Azerbaijan's intention to integrate with the Euro-Atlantic structures; we are cooperating in the sphere of diversification of energy supplies to Europe," the envoy said.

Europe put renewed focus on energy diversity in 2008. January 2009 brought increased emphasis on that goal following a decision by Russia to halt gas supplies to Europe following a debt row with Ukraine.

The envoy addressed the crisis, noting that while Warsaw and Moscow are important partners in the energy sector, the European Union needs to focus on alternative gas routes as 80 percent of the Russian gas for Europe travels through Ukraine.

"I think the conflict between Russia and Ukraine proved the importance and the need to diversify energy supplies," he said. "It turned out that Europe, including the EU states such as Poland, Slovakia and Bulgaria, are too dependent on supplies from Russia."

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Polish companies face hedging losses

A year ago, the smart money in Poland and other central European emerging markets was that local currencies would continue to strengthen against the euro and the dollar, so many companies took the precaution of hedging their foreign currency exposure.
Trouble came when the global economic slowdown hit the region late last year, causing currencies like the Hungarian forint and the Polish zloty to drop sharply as investors fled to the safety of the dollar. To make matters worse, some companies had taken particularly aggressive hedges, hoping to use what was seen as a sure bet to make extra profits.

Now the estimated loss faced by Polish companies could be as high as 5.5bn zlotys ($1.7bn, €1.3bn, 1.2bn), according to the Financial Supervision Authority, Poland’s financial markets regulator.

Waldemar Pawlak, the economy minister, said that about 200 companies had already alerted the government to problems with hedges.

“In some cases the situation could be dramatic,” he told Parkiet newspaper. “That is the case with companies where the transactions were not undertaken to lessen risk but to speculate; where the foreign currency revenues of a company are a lot lower than the amount of foreign exchange they would have to pay the bank.”

To reduce their costs, some companies, including those with low foreign currency revenues, set up hedging options with several banks that would allow them to buy euros at a preferable rate, but the transaction was then financed by bets in the opposite direction, exposing them to significant risk if the zloty ended up falling instead of rising.

“These companies wanted to in some way protect themselves against a drop in revenue due to the strengthening zloty,” said Zbigniew Szczerbetka, managing partner for Poland at Deloitte, the consultancy. “They began to look for ways of improving the achievable rate, and the only way to do that was to increase the level of risk.”

Some companies have already gotten into difficulty over ill-conceived hedging operations. This month Odlewnie Polskie, a foundry equipment maker, declared bankruptcy because of the “violent and unpredictable increase in the rate of the euro and the speculative nature of options agreements”, according to a management statement. Some banks are also facing losses from customers unable to pay out unfavourable hedging contracts.

Boleslaw Bujak, chief executive of Ropczyce, whose subsidiary Elwo, a filter maker, recently declared bankruptcy, told the Gazeta Wyborcza newspaper; “In retrospect I can only say we chose bad instruments. But in the summer they were widely promoted. The offer was very attractive and it seemed a good way to protect ourselves against the strengthening zloty. All the opinions we had in the summer showed that the zloty would continue to strengthen.”

But it did not. Since its peak in July, the zloty has dropped by 43 per cent against the euro and by 60 per cent against the dollar.

The worry now is that companies will be reluctant to hedge their currency risk in the future, which could be very risky. Poland’s three shipyards failed in large measure because they failed to secure themselves against the strong zloty in recent years, and some analysts are predicting that the Polish currency will strengthen again later this year, when Poland becomes one of the few European economies not in recession.

“Over time, the real economy out-performance will matter,” said Juliet Sampson, chief economist for emerging Europe at HSBC. “No one thinks the zloty is currently overvalued.

By Jan Cienski,ft.onet.pl

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Poland cuts key interest rate to 4.25 percent

Poland's central bank slashed its key interest rate by three quarters of a percentage point to 4.25 percent Tuesday amid signs the country's economy is slowing.

The National Bank of Poland announced the cut to its seven-day intervention rate on its Web site. It was expected to release details about the decision later Tuesday.

The bank also cut the key interest rate by 0.75 percentage points last month.

Analysts had expected the bank to cut rates in January, although many predicted cuts of just a half percentage point.

Government data shows that industrial production fell 4.4 percent in December compared with the same month last year, while unemployment climbed for the second consecutive month to 9.5 percent in December.
Poland's currency, the zloty, has also shed value against the U.S. dollar and the euro in recent months.
Source: iht.com

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