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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 outlined on Nov. 18 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 assessors 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.”

Bonds Rise

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 second-most among emerging-market currencies worldwide on Nov. 18 after the Hungarian forint, gaining 0.5 percent to 4.4259 per euro.

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.

Ten-year zloty yields rose 1 basis point to 5.81 percent at noon in Warsaw, while bund yields fell eight basis points to 1.88 percent. The zloty eased 0.2 percent to 4.439 to the euro at 12:16 p.m.

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.

More details are needed before the full effects on trimming the gap to exit the European Union’s excessive-deficit procedure are known, Matteo Napolitano, lead analyst for Poland at Fitch, said by phone on Nov. 18. Fitch will be updating its rating on Poland “no later than the first quarter of 2012,” he added.

The changed will take time to produce “tangible results,” increasing the likelihood that they may be watered down or that support for them may wane under future administrations,’’ Moody’s Investors Service said today in a weekly credit column. “Despite carrying positive credit implications as economic benefits trickle in, the announced measures bear no immediate effect on the government’s A2 rating,” it 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.

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