Polish Fiscal Plan Improves Bond Outlook, Belka Adviser Says

Poland’s pledge to increase levies, reduce tax incentives and raise pension contributions may boost the country’s bonds, said Miroslaw Gronicki, an adviser to central bank Governor Marek Belka.

Prime Minister Donald Tusk in a Nov. 18 policy speech outlined the government’s plan to narrow the budget deficit to about 3 percent of gross domestic product next year and 1 percent in 2015, cutting debt to 47 percent of GDP in four years.

In his first policy speech since winning re-election last month, Tusk, 54, had to weigh investor expectations for a pledge to narrow the budget shortfall against his coalition partner’s concern that cuts may endanger economic growth and living standards.

“Premier Tusk sent a clear signal that he understands the seriousness of the situation,” Gronicki said in an interview in Warsaw yesterday. “The real value of the plan will be seen in details coming already in the 2012 budget. Ratings agencies and markets will of course wait for those details. For now, we see a proper plan that clearly gives Poland a chance for improved evaluation of its bonds.”

Gains in 10-year government zloty-denominated bonds reduced the extra yield demanded by investors in the debt over German bunds by nine basis points, or 0.09 percentage point, to a two- week low of 381 basis points on Nov. 18, according to data compiled by Bloomberg. The zloty climbed the most among emerging-market currencies worldwide, gaining 0.8 percent to 4.4163 per euro on Nov. 18.

A 2 percent reduction of disability contributions by employers will add about 7 billion zloty ($2.14 billion) to state revenue, while pensions revaluation changes will cut spending by about 3 billion zloty, narrowing the deficit to about 4 percent of GDP next year, Gronicki said.

Tax Increases

To reach Tusk’s target, “it’s very likely the government will have to raise the VAT and the excise tax,” Gronicki said.

The government may also count on higher dividend income from state-controlled companies and on the central bank’s profit, while increasing levies on copper and silver “is only a matter of a future,” he said.

A “fiscal adjustment” through the reduction of benefits for more affluent families may slow GDP growth to less than 2 percent and ease pressure on inflation, supporting stable interest rates next year, Gronicki said. Lower prices for imported energy and domestic food products may help the central bank reduce borrowing costs, he added.

The Narodowy Bank Polski on Nov. 9 left the seven-day interest rate at 4.5 percent, keeping it unchanged for a fifth month. The bank raised rates four times between January and June by a total of 1 percentage point to combat inflation, which in May soared to a decade-high of 5 percent and has been hovering around 4 percent since then.

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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