POSTCARD FROM POLAND
Poland Continues As Bright Spot in Region
IMF Survey online
February 3, 2012
- Country was able to spend during economic crisis
- Growth supported by high domestic demand
- Banking system well capitalized
Poland was granted a precautionary loan under the IMF’ Flexible Credit Line in 2010 but hasn’t needed to draw on the funds.
How did Poland manage to weather the global crisis with some of the highest growth rates in Europe and a stable banking system when most of its neighbors in the region faced―and continue to face―so many problems?
In an interview with IMF Survey online, Mark Allen, the IMF’s representative for eastern and central Europe based in Warsaw, discusses Poland’s secret to success.
IMF Survey online: Poland’s economy has been very resilient since 2008, and the country continued to fare quite a bit better than some of its European neighbors in the past year. Why is that?
Allen: Poland is in some ways more like a large emerging market, a version of Turkey or Brazil or possibly China. In the four years since the crisis began, the Polish economy grew by 15 percent and the nearest competitor in the European Union, which was Slovakia, grew by 8 percent. So the performance has been extremely strong.
Poland has benefited from being a large economy with quite substantial domestic demand. There has been public investment growth, with Poland experiencing some of the highest in Europe in the course of the last year. Consumption has held up well, in some measure thanks to European Union funds flowing into the country. And the government was in a position to deploy a countercyclical fiscal policy―in other words, putting more demand into the economy during a time when it was under pressure.
IMF Survey online: Was Poland able to weather the current crisis mainly because of the work the government did before 2008, which gave the Poles, as you pointed out, extra money to spend once the downturn hit?
Allen: Exactly. They didn’t allow the boom in the banking system and the housing boom to get out of hand. They didn’t run large fiscal deficits before the crisis. Their debt, even though, at close to 55 percent, is a little bit high by emerging market standards, did not give rise to concern.
So yes, the fact that the economy was in a good position going into the crisis really has helped Poland enormously.
IMF Survey online: And yet no one is immune in the current environment, especially given the ongoing crisis in the eurozone. What are the key risks the Polish economy faces this year?
Allen: Well, the main risks to Poland are from factors outside of its control. The IMF has downgraded its forecast for the global economy, and we’re now expecting the eurozone to be in a slight recession this year.
Poland could be affected in three ways. The first is through external demand. The Polish economy is dependent on exports to the eurozone, and through the eurozone to other parts of the world. So the export channel is one way Poland could be affected by this slowdown in the eurozone and in world growth.
The second issue is that capital to emerging markets could be more difficult to come by. When financial markets are concerned because the amount of money flowing to emerging markets declines, this can cause downward pressure on the exchange rate. Here in Poland, although the problem is not as severe as elsewhere, there are quite a lot of foreign exchange mortgages whose repayment burden would go up if the exchange rate depreciated.
And the third channel through which Poland might be affected is through problems in the West European banking system. About two-thirds of the national banking system is owned by banks headquartered outside Poland, mostly in Western Europe. If the parent banks are having difficulties in recapitalizing themselves or in obtaining liquidity, there could be some spillover to the subsidiaries in Poland. Having said all that, our assessment is that Poland is fairly well placed to deal with these problems.
And finally, the banking system itself is well capitalized and highly profitable, and in rather better shape than in many other countries.
IMF Survey online: If the Polish banking system has been deleveraging, can you explain the ways in which it has been happening? Have parent banks been selling off assets or raising capital?
Allen: The Polish banking system is well capitalized because the financial supervisors insisted in 2010 that all profits be retained by banks rather than distributed. And since the banking system was profitable, this gave the banks quite a capital boost. It’s true that raising new capital on the markets is fairly difficult, but the Warsaw Stock Exchange is pretty liquid and so it’s possible that more capital could be raised in that way. But the basic way in which capital has been raised by Polish banks has been through the retention of profits, and they will do so again this year for those banks whose capital falls below the rather high level defined by Polish regulations.
That said, there is a problem of non-performing loans on banks’ balance sheets. But again, the problem is not as severe as in a number of other countries. And the domestic banking system is actually much less leveraged than the banking system of the parent banks in western European countries.
IMF Survey online: Poland hasn’t needed to draw on the IMF’s Flexible Credit Line, but it’s there in case it needs it. Yet there have also been reports recently that Poland will help boost the IMF’s lending capacity. How does Poland manage that process?
Allen: The Flexible Credit Line for Poland has been extremely useful. Of course, they haven’t drawn on it because they haven’t been facing a crisis. But it’s precisely the availability of that funding from the IMF that has given a lot more confidence both to the government and to the financial markets. It’s quite remarkable, when talking to Polish officials and to people in the financial markets, how often and how positively they mention the support the credit line has provided.
But you may correctly ask: if Poland has a credit line from the IMF in case it has problems, why is it also going to contribute money to increase the IMF’s lending capacity?
The answer is twofold: First, this is a European Union response to the need for a stronger IMF, and Poland as a European Union member wants to make its contribution. The way it does so is by lending or by making part of its foreign exchange reserves available to the Fund. If the IMF were to use this money, it wouldn’t cause balance of payments pressures for Poland. It would just be a change in how its foreign exchange reserves are invested.
If Poland needed to draw on the credit line, however, then we would not use Poland’s contribution to the IMF’s lending capacity. But in the event that, as we confidently expect, Poland will not have to use the credit line, then making money available to the IMF out of Poland’s foreign exchange reserves is a very sensible and generous way to go.
IMF Survey online: When we last spoke in March 2010, you described the mood in Poland as upbeat. Has this changed?
Allen: Well, I think the people are quietly confident, but not complacent about the current situation. They’re aware of the storms outside. A large public investment program is winding down so there’s somewhat less stimulus from public investment. But the figures on private investment are pretty good, and consumers still seem to be pretty confident.
■ This interview is an edited version of a podcast with Mark Allen, conducted on January 25, 2012.