Poland argues euro best defense against crisis

Strong public finances and quick adoption of the euro are the best remedy for Poland's deepening economic turmoil, the country's finance minister said Thursday, as new figures showed a sharp drop in industrial production.

"Secure public finances and a quick adoption of the euro are the best way out of the crisis for Poland," Jacek Rostowski told parliament.

Euro membership is still years away, but the subject gained new urgency after Eastern European currencies and stock markets were hit in recent days by continuing bad economic news.

Poland and its zloty have been suffering after initially avoiding the worst of the initial fallout triggered by the collapse of banks and financial institutions in the United States and western Europe.

The zloty stood at 4.73 to the euro on Thursday — better than Wednesday's level of 4.89. That good news, however, was tempered by the Central Statistical Office's announcement that Poland's industrial production dropped 14.9 percent in January compared with the same month last year.
It was the third consecutive month of declining industrial production — a key indicator for the overall health of the economy.

Prime Minister Donald Tusk said earlier this month that Poland would stick to its plans to adopt the euro in 2012, but acknowledged that the financial crisis could threaten that goal.

The government has refused to increase the budget deficit even after the crisis pushed down 2009 growth estimates from around 3.7 percent to 1.7 percent. Instead, it opted earlier this month to find 19.7 billion zlotys ($5.5 billion) in savings in the 2009 budget.

"We are ready to find more savings, and if that doesn't suffice we don't want to raise taxes or increase the budget deficit, but we have to be prepared for a situation in which we have to choose the lesser evil," Rostowski said.

Danske Bank chief analyst Lars Christensen said Poland's public finances "are relatively strong, both in a central European and even a European perspective," and that the government is "more or less on track and moving in the right direction."

Before adopting the euro, prospective members are required to spend at least two years in an exchange rate mechanism, or ERM-II, that demands low and controlled inflation, healthy public finances and a budget deficit below 3 percent. Meeting Poland's 2012 euro target would require Warsaw to start that process this year.

Analyst Christensen said the government is veering onto a "dangerous path" with its continued talk "about ERM-2 and euro adoption when it is clear that there is no commitment on the other side of the table from the ECB (European Central Bank) or the EU Commission."

Christensen said such talk raises too many questions — such as where to peg the zloty — and "creates uncertainty rather than certainty."

Rostowski, who has been criticized by the opposition for his handling of the economy in the face of the turmoil, said adopting the euro would shield Poland's currency from pressures that have seen the zloty drop as much as 15 percent in 2009 to 4.9 against the euro and pushed up foreign debt payments.

"Our ambition to quickly join the euro stems from the fact that it is the best means to fight the crisis in Poland," Rostowski said.

The 16 countries using the euro — including Poland's neighbor Slovakia, which joined Jan. 1 — have seen growth plummet and strain on their public finances, but have not had to deal with added pain of sharp currency devaluations. Some non-euro countries, such as Iceland, Hungary, and Ukraine, have needed IMF bailouts after their currencies plunged.
Source: iht.com

Poland to unveil budget cutbacks as growth slumps

Poland plans to unveil up to 20 billion zlotys in budget savings on Tuesday, as unemployment soars and investment falls, cutting into the previously plentiful income of the European Union's biggest ex-communist state.
Economists have slashed forecasts for growth this year as the global financial crisis hit home, raising concerns that a 2009 budget plan prepared almost half a year ago would fall apart due to plummeting revenues.
The head of the state's investment agency said on Tuesday that foreign direct investments coming into Poland were likely to drop to 7-10 billion euros in 2009 from about 12 billion in 2008.
Labour Minister Jolanta Fedak added that unemployment could jump to as much as 12 percent this year, having fallen into single figures for the first time since Poland's early 1990s transition from communism.
Slawomir Nowak, a top aide to the prime minister, said the government would announce a savings plan later on Tuesday and that it had found a planned 17 billion zlotys ($4.89 billion) in savings, despite doubts expressed by analysts.
But a government source confirmed for Reuters a media report that the government could increase the value of savings to 20 billion as it seeks to fill the prospective hole in revenues.
"On one hand it is rationalisation (of spending)," Nowak told Polish broadcaster TVN's morning show. "But the majority is freezing of investments (until later)."
ZLOTY HIT
Where Western European governments have upped spending to stimulate their economies, Romania and Hungary have led spending cuts by eastern European governments concerned about their ability to bring in external finance.
Poland's zloty hit a four-and-half-year low on Tuesday and the large cap WIG 20 bourse index slid close to levels last seen in 2003 as investors continued to dump riskier assets in emerging Europe in favour of more developed western markets.
Austrian and Italian officials have also warned in recent weeks that a squeeze on capital for their banks in the region could halt investment in Central Europe's once-booming ex-communist economies.
Poland, with a population of 38 million, saw its economy grow 4.8 percent in 2008, down from 6.7 percent in 2007. It is expected to slow even more sharply this year with some even expecting growth close to zero.
In response to the spreading economic gloom, growing fears over job security and weakening consumption, the central bank has cut interest rates three times since November, by a total of 175 basis points, bringing the key rate down to 4.25 percent.
Underlining the pace of the country's economic slowdown, two of the three most persistent hawks on the central bank's 10-strong Monetary Policy Council (MPC) called on Tuesday for another rate cut this month.
The deteriorating outlook in Poland has prompted even the most hawkish members of the central bank's MPC to back a further rate cut this month.
"We're still in an easing cycle... Every sharp decline in industrial output breaks the balance in the economy. We can't allow for that now," Marian Noga, who had consistently backed rate hikes during the bank's previous monetary tightening cycle, told the Gazeta Prawna daily in an interview.
Source:Adrian Krajewski and Kuba Jaworowski, /business/feedarticle/8340065

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.
Source:iht.com