Poland SEB MERCHANT BANKING COUNTRY RISK ANALYSIS 13 March 2012

Transcription

1 Poland SEB MERCHANT BANKING COUNTRY RISK ANALYSIS 13 March 1 Analyst: Per A. Hammarlund. Tel: per.hammarlund@seb.se Summary: Poland was the only EU country escaping a recession in the wake of the 8 global financial crisis, as a result of fiscal stimulus and a relatively low dependence on external demand. Real GDP growth remained strong in 11, reaching roughly.3%, but as the global economy and, in particular, Europe may be entering a new slowdown, Poland has less room to manoeuvre. General government debt is approaching the % of GDP limit stipulated in the constitution, forcing the government to consolidate public finances amid slowing economic activity and a potential sovereign debt crisis in Europe. Country Risk Analysis The Polish economy has outperformed its European peers. Polish real GDP growth quickened to.3% in 11 from 3.9% in 1. Growth in Q 11 remained strong at 1.1% q/q, despite a slowdown in the EU and rising risk aversion in the second half of 11. The expansion in 11 was driven by rising fixed investment and exports Economic Growth & Sentiment Poland, Real GDP, Growth (LHS) [c.o.p quarters] Economic Sentiment Indicator (ESI), Poland Economic Sentiment Indicator (ESI), Germany The outlook for 1 is uncertain. The Polish economy depends less on trade than other Central and Eastern European (CEE) economies merchandise exports are roughly % of GDP. Nevertheless, it supplies intermediate goods to the German export sector, making the business cycle highly correlated to that of its large western neighbour. While growth in the EU slowed sharply in H 11, recent data from Germany, as well as Poland, indicate that the expected deceleration in 1 will not be as severe as initially feared. The IMF and the European commission forecast that Polish real GDP will expand by.5% in 1, supported by public spending on infrastructure improvements ahead of the UEFA Euro 1 championship, as well as private consumption. Inflation remains above target, but will slow gradually. Consumer price inflation averaged.% in 11, up from.7% in 1 and above the National Bank of Poland s (NBP s).5% target rate (±1%). Inflation was driven by accelerating (but still moderate) money supply (M) and credit growth, as well as by a hike in the VAT in January 11. Consumer price index (CPI) inflation fell to.1% y/y in January 1 and looks likely to drop gradually to between 3% and 3.5% by the end of the year, as hikes in regulated prices offset slower demand growth. We also expect inflation to be held in check by a gradual appreciation of the Polish zloty in 1. Index important your attention is drawn to the statement on the back cover of this report which affects your rights.

2 Despite rate hikes and a hawkish rhetoric by the NBP, monetary policy has been accommodative of the government s efforts to boost growth since the 8 global financial crisis. The key reference rate was raised by 1 percentage point between January and August 11 to.5%, leaving the real interest rate barely positive Consumer Price Inflation Inflation Target Poland, Consumer Prices, Total, Index, 1998=1 [c.o.p 1 months] Core CPI, % y/y The zloty exchange rate is fully flexible, which helped the export sector after the 8 crisis when the zloty depreciated by around 5% and 35% from peak to trough against the US dollar and the euro, respectively. The zloty has since strengthened, but remains roughly 35% below its peak value in 8 against the dollar and % below its value against the euro. The zloty has fared even worse against the Swiss franc, remaining % below its 8 high (as of March 13, 1). With Poland being the largest economy (behind Russia and Turkey) and having the most liquid capital markets in CEE, the zloty has become a bellwether for Eastern Europe leading to large fluctuations in the exchange rate in response to changing investor sentiment on the region. The volatility has increased the risk of rising problem loans in the banking sector, as loans extended in foreign currencies account for approximately 3% of total credit. Government debt is approaching its constitutional limit. Public finances have deteriorated since the 8 crisis and 1 will likely be a pivotal year for Poland. Government debt started from a moderate level at 5% of GDP in 7, giving the government ample resources to provide fiscal stimulus and avoid a recession during the global downturn in 8-9. However, after generating budget deficits of 7% in 9, 8% 1, and an estimated 5.% in 11, government debt has risen to 55% of GDP, leaving less room to stimulate the economy in the face of a downturn. Government debt looks likely to peak at a manageable % of GDP in 1. However, if growth slows by more than expected and fiscal consolidation fails, the Polish government could face increasing financing pressure. The constitution limits general government debt to % of GDP. (The Polish definition of debt differs from the ESA 95 and puts the current level roughly percentage points lower.) The constitution also puts severe restrictions on the budget when debt exceeds 55% of GDP. Unless Poland enters into a deep recession, which currently is unlikely, debt will probably rise Basis point Year Yield & CDS Spread Poland, Government Benchmarks, Bid, 1 Year, Yield (RHS) Poland, CDS, 5 Year (LHS) above 55% of GDP in the next two years, but remain below the hard % ceiling (according to the national definition). In order to stabilise debt, the government will likely have to implement unpopular fiscal reforms. It achieved the 5.% budget deficit target in

3 11 by increasing VAT and redirecting pension contributions from the private system to the pay-as-you-go public system. However, in order to achieve the 3% of GDP deficit target in 1, the government will likely have to take additional measures. Moody s mentions, for example, raising the VAT again, freezing public sector wages, increasing certain employment fees, introducing royalties on mining, hiking excise taxes, cancelling tax breaks, and reforming of the pension system. A weak zloty and current account deficit have pushed up external debt. The current account recorded an estimated deficit of.% in 11, roughly the same as in 1. The deficit in 11 was driven largely by high commodity prices and imports related to rising infrastructure investments. The long-running deficit has traditionally been caused by shortfalls in the net USD (billions) External debt, total, USD (LHS) External debt, total, PLN (RHS) External Debt PLN (billions) merchandise trade and net income accounts. It has been financed by relatively strong net FDI, debt inflows, and, since, capital transfers from the EU (roughly % of GDP). However, due to risk aversion and an uncertain European recovery, FDI have moderated, putting an increased onus on borrowing. External debt was on a moderate upward trend already before the crisis, but jumped 9 percentage points to almost % of GDP in 9 and an estimated 7% in 11. One mitigating factor reducing roll-over risks is intercompany lending, which accounts for approximately 5% of total external debt. The banking sector, with foreign banks accounting for two-thirds of assets, is also partly funded by loans from parent banks, although not to the same degree. Increasing purchases by foreign investors of local currency bonds have also pushed up external debt. Government external debt now accounts for roughly 35% of total external debt. The rapid rise in external debt may become a cause for concern if it continues. However, at current levels it is manageable, supported by decent GDP growth, strong interest by foreign investors, relatively high reserves, and a $3 billion Flexible Credit Line (FCL) from the IMF. The financial sector is well capitalised. Non-performing loans (NPLs) are relatively high at roughly 8% of total loans. Nevertheless, the system-wide capital adequacy ratio is strong at more than 13%, of which more than 9% is classified as Tier 1 capital. The Polish Financial Supervision Authority (KNF) has pushed banks to capitalize profits, the latest example of which was the February 17 announcement by the KNF that Polish banks should limit dividend payments to no more than 5% of earnings, with more severe restriction on weaker banks. Banks have generally posted good results in 11, but 1 could be challenging if European parent banks withdraw funding and the zloty exchange rate reverses course and starts to depreciate again. Mortgage loans in Swiss franc account for close to % of total loans, which could become a source of problem if GDP growth stagnates and unemployment rises sharply. The quality of Poland s political institutions is strong, but lags its Western European peers. Poland ranks on average in the 5 th percentile among the 1 countries covered in the World Bank s governance indicators. The coalition government of the centre-right Civic Platform and the centrist Peasants party led by Prime Minister Donald 3

4 Tusk was re-elected in October 11. The government s majority in parliament is slim, but it should be able to push through controversial reforms such as increasing the retirement age to 7 for both men and women, as both parties have a strong interest in keeping the coalition intact. With the next elections not due until 15, the administration will likely continue to pursue generally market-friendly and potentially unpopular policies including privatisation and fiscal consolidation. The main opposition party, the Law and Justice (PiS), tend to be more populist and favour more nationalist policies. However, even if the current government were to fall, we do not envisage a major change in economic policy direction, due to a general agreement on the need for fiscal prudence. ** -- ** Key figures 1 Population (mil) 38. GDP/capita (US $) 1,898 GDP (% chg). CPI Inflation (%) 3.1 Curr.Acc. Balance (% of GDP) -5. Reserves/imports (months) 5.7 Budget balance (% of GDP) -3.8 Government debt (% of GDP).1 Poland: Risk Profile Chart Key: The farther from the centre, the less risk. Macro balance Absence of Event Risk Resilience Liquidity Information Poland Average EM Russia bñíéêå~ä=ê~íáåöëw= External ratings: cáíåüw=== JLéçë Fitch: A- / Stable jçççódëw=_~p= Moody's: A / Stable pcmw== JLéçë= S&P: A- / Stable Peers: Czech Rep. Hungary Estonia Graph: The pentagon shows Poland's Turkey's risk risk profile worse to be than stronger average than in the all average respects of all including emerging to market its traditional countries on competitor, factors such Brazil, as resilience, reflecting absence weaker of liquidity, event risk, macro and information. balance and absence of event risk.

5 Poland: Economic Indicators Macroeconomic GDP real (% chg) GDP (bn US$) GDP/capita (US$) 1,33 11,337 1,3 13,87 1,898 1,88 13, 1,71 Investments/GDP (%) Trade/GDP (%) Oil production, bpd (') Money & Prices CPI inflation (%) Money, M (% chg) Interest rates (%) Stock prices (% chg) Exch. Rate (US$) Government Finances Budget balance/gdp (%) Govt debt/gdp (%) Balance of Payments (US$ bn) Current account (% of GDP) Export of goods Imports of goods Other current acct flows Net FDI Debt service requirement Net other capital flows Chg in intl reserves External Debt & Liquidity (US$ bn) Reserves Gross external debt (% of GDP) Gross External Debt o/w short term debt Source: OEF (Oxford Economic Forecasting) and SEB estimates. *IMF forecast Type of government: Democratic: Coalition of centre-right Civic Platform and centrist Polish Peasant Party Next elections Parliamentary and presidential elections 15 Other: Latest PC deal 1991 Recent IMF programs Stand-By agreements in -93 and -9. FCL in 9 and 1. 5 Credit Growth 5. Zloty Exchange Rate C redit, total [c.o.p 1 m onths] Credit, non-financial corporations [c.o.p 1 months] C redit, households [c.o.p 1 m onths] EUR/PLN USD/PLN CHF/PLN 7. Interest Rates 7 W arsaw SE, W IG Index Index (thousands) Policy Rates, Reference Rate (7-Day NBP Bill Rate) Interbank R ates, W IB O R, 3 Month, Fixing

6 Disclaimer Confidentiality Notice The information in this document has been compiled by SEB Merchant Banking, a division within Skandinaviska Enskilda Banken AB (publ) ( SEB ). Opinions contained in this report represent the bank s present opinion only and are subject to change without notice. All information contained in this report has been compiled in good faith from sources believed to be reliable. However, no representation or warranty, expressed or implied, is made with respect to the completeness or accuracy of its contents and the information is not to be relied upon as authoritative. Anyone considering taking actions based upon the content of this document is urged to base his or her investment decisions upon such investigations as he or she deems necessary. This document is being provided as information only, and no specific actions are being solicited as a result of it; to the extent permitted by law, no liability whatsoever is accepted for any direct or consequential loss arising from use of this document or its contents. SEB is a public company incorporated in Stockholm, Sweden, with limited liability. It is a participant at major Nordic and other European Regulated Markets and Multilateral Trading Facilities (as well as some non-european equivalent markets) for trading in financial instruments, such as markets operated by NASDAQ OMX, NYSE Euronext, London Stock Exchange, Deutsche Börse, Swiss Exchanges, Turquoise and Chi-X. SEB is authorized and regulated by Finansinspektionen in Sweden; it is authorized and subject to limited regulation by the Financial Services Authority for the conduct of designated investment business in the UK, and is subject to the provisions of relevant regulators in all other jurisdictions where SEB conducts operations. SEB Merchant Banking. All rights reserved.