Page 36 - bne_Magazine_July_2017

36 I Special focus bne July 2017
GDP volume growth rate
(corresponding period of the previous year = 100, constant prices of the previous year)
Consumption expenditure of the households sector
Gross fixed capital formation
expected external demand,” notes Louis at Fitch. “Increased domestic political tensions and weaker predictability of economic policy could affect Poland’s attractiveness as a place to invest and are another risk to the outlook, although its impact is difficult to assess today.”
The picture is also far from clear in the medium term. “CEE economies are now running at close to full employment,” says Carson. “While we think growth should be strong this year, rising core inflation will prompt tighter monetary policy than most expect, and growth will start to slow by 2018/19.”
For the moment, the strong growth revival is also pushing the rating agencies back into line, at least from Warsaw’s point of view. Standard
& Poor’s surprised many when it handed Poland its first ever downgrade in January 2016. Many claimed the move was political, but S&P’s peers were quick to warn the government over fiscal discipline.
However, Moody’s raised its outlook on the sovereign’s ‘A2’ rating to stable from negative in May. The agency cited “reduced risk of loose fiscal policy and contained uncertainties stemming from government policies”.
On top of the forecast for a strong acceleration in GDP growth in 2017, the Polish government has set a tight deficit
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Gross domestic product
target 2.9% of GDP. That rise of 0.5pp on the gap last year reflects spending plans that will see the Family 500+ scheme cost around 1.2% of GDP and the retirement age cut another 0.1%. That leaves little room for error, but most assume Poland will just remain inside the 3% threshold above which member states risk entering the EU’s excessive deficit procedure (EDP).
That’s thanks to a mix of good luck, clever accounting, and discipline. PiS proved during its previous spell in office in 2005-07 to be a capable fiscal manag- er, while it seems that despite the party’s bitter dislike of Brussels, it knows which side its bread is buttered on economi- cally. At the extremes, entering the EDP
favourable circumstances,” says Fitch’s Louis. “The closing of the negative out- put gap (the EU Commission forecasts
it will be positive in 2017) is supporting government revenues. The govern- ment balance has also benefited from contained interest payments, thanks to the low rate environment, and decline in investment linked to the EU-fund cycle in 2016. It is also likely that the govern- ment’s strategy to increase tax compli- ance, in particular in reducing the VAT gap, has delivered some results.”
In short, it’s tempting to ask how much Warsaw is tempting fate. The first quar- ter of 2016 also started off optimisti- cally, before economic activity gradually tailed off throughout the year. Chal- lenged to find funding options for its spending plans, PiS has left the budget heavily reliant on strong GDP to support revenues, and will likely have to put
off further populist expenditure for the meantime.
“Slower-than-expected GDP growth
is the main risk to the forecast,” Louis sums up. “We expect no additional deficit-increasing policy initiative this year. However, weaker predictability of fiscal policy since the 2015 election cre- ates another risk.”
The risk is summed up by the European Bank for Reconstruction and Develop- ment in its latest outlook published on May 10. The institution maintained its GDP growth forecast at 3.2% for 2017,
“In short it’s tempting to ask how much Warsaw is tempting fate”
can result in fines, or a reduction in EU funds. That would dramatic for Poland, which is scheduled to benefit by €100bn in 2014-20.
Hence, ironically enough given Poland’s numerous political confrontations with Brussels, the EU’s EDP limits are seen as a major anchor for PiS.
“Fiscal metrics have benefited from
based on recovering public investment and strong household consumption.
“Nevertheless, the generous social spending and rebounding public capital expenditure, coupled with a lower retirement age may lead to the breach of the 55% public debt ceiling by 2019,” the EBRD warns. “In which case the public finance law effectively mandates a very significant fiscal tightening.”