July 16 (Bloomberg) -- Poland’s government, facing the slowest economic growth since the 1990s, unveiled plans today to widen the budget deficit by 16 billion zloty ($4.95 billion) and suspend rules limiting fiscal stimulus.
Budget revenue will fall about 24 billion zloty ($7.4 billion), or 8 percent, short of the 2013 plan as economic growth slows amid eroding consumer confidence and a euro-region crisis that proved “more protracted than expected,” Finance Minister Jacek Rostowski told reporters at a news conference in Warsaw. The government seeks more than 8 billion zloty in extra spending cuts, lowering the country’s structural deficit even as this year’s budget shortfall widens, he said.
“Under the current conditions of stagnation, Poland’s economy needs stimulus in the short term and fiscal consolidation in the long term,” Rostowski said. “Widening the government budget deficit by about 1 percent of gross domestic product is a strong boost by any normal economic canon.”
Poland’s economy, the only one in the European Union to avoid recession since 2009, will expand 1.1 percent this year, according to central bank projections published on July 8. That would be the slowest pace since at least 1997. Poland’s 2013 budget was based on an economic growth forecast of 2.2 percent, compared with 1.9 percent in 2012.
The zloty extended gains after the announcement, advancing 1 percent to a four-week high of 4.2467 against the euro at 4:54 p.m. in Warsaw, making it the biggest gainer among 24 emerging market currencies tracked by Bloomberg. The yield on Poland’s 10-year government bond rose one basis point, or 0.01 percentage point, to 3.93 percent, according to data compiled by Bloomberg.
The market reaction shows “growth stimulus seems to be more important that sovereign credit risk,” Rafal Benecki, chief economist at ING Groep NV’s Polish unit, wrote in a note.
“We can’t afford to overdo budget cuts that could restrict consumption,” Prime Minister Donald Tusk said at the news conference. “We need to boost the economy at the critical moment, which is this year, while the first signs of recovery should be visible in late 2013 and 2014.”
Poland plans to waive fiscal safety rules that prohibit increasing the budget deficit once public debt tops 50 percent of gross domestic product, Rostowski said. The suspension would apply to 2013 and 2014 only and the safeguard threshold will remain in the amended public finance law, he added.
A new spending rule, to be adopted separately, will increase “flexibility” in lean years and restrict expenditures when the economy speeds up, according to Rostowski.
While debt has been above 50 percent of output since 2010, Tusk’s government has reduced its budget deficit from a record 7.9 percent of GDP that year to 3.9 percent last year.
The planned changes aren’t “hair-raising,” Piotr Kalisz, the chief economist at Citigroup Inc.’s Polish unit, said by phone from Warsaw. The 45 percent increase in this year’s budget deficit fits the “higher end” of market expectations and should ensure that Poland’s economy expands 1 percent to 1.5 percent this year.
The cost of protecting Polish debt against non-payment using credit-default swaps was unchanged at 91 basis points today, data compiled by Bloomberg show, compared with 88 basis points for Chile, which is rated two levels above Poland’s A2 grade by Moody’s Investors Service.
Fitch Ratings, which raised the outlook on Poland’s A- debt rating to positive from stable on Feb. 21, said today it’s reserving judgment on the budget announcement.
“We would like to wait for a fuller picture of various developments currently underway before assessing any impact,” Matteo Napolitano, a London-based director at Fitch, wrote in an e-mail today. “This includes final decisions on pension-funds reform and the new structural expenditure rule.”
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