New Bank Tax Smothers Polish Loan Growth as Economic Risks Rise

  • Loan growth slides to slowest pace in more than two years
  • Banks turn down more corporate borrowers: central bank study

Poland’s move to fund social spending by taxing the assets of banks risks hobbling one of Europe’s fastest-expanding economies as evidence mounts that the policy is eroding credit growth.

A month after imposing a levy on lenders’ assets, loan expansion slid to the slowest pace in more than two years in March. Instead of lending into the real economy, banks opted to buy a record amount of government debt, which is exempt from the tax, in the first two months of 2016, Finance Ministry data show.

Industry profits were already reeling from some of the lowest lending rates on record and the added burden is forcing banks to compensate by ring-fencing as much of their balance sheets as possible from the tax. The central bank said on Tuesday that lenders were turning down more loan applications partly in response to the tax, while Oxford Economics predicted credit retrenchment will shave a 0.2 percentage points from 2016 growth.

"This combination of measures is negative for long-term growth," said Mikhail Liluashvili, a London-based economist for Central and Eastern Europe at Credit Suisse Group AG. "Taxes bring distortions to economic activity and reduce incentives, in this particular case incentives to lend."

Social Spending

The government formed by the Law & Justice party, which won last year’s election pledging to boost social spending while taxing banks and retailers, introduced the annual levy of 0.44 percent of lenders’ assets in February, the highest in the EU, according to Oxford Economics.

Spending proceeds from the new tax on social programs such as child subsidies may provide an immediate boost to growth, "at the expense of medium-term prospects" as the impact of less bank lending filters through into economic activity, Liluashvili said.

Poland’s economy is expected to expand 3.6 percent this year, the fastest pace in the European Union behind Romania and Ireland, before slowing to 3.5 percent in 2017 and 2018, according to a median of 33 analysts’ forecasts compiled by Bloomberg.

A quarterly central bank survey of business conditions found banks have turned down more loan applications this year while some of the 1,879 companies participating in the poll reported being charged higher fees and interest.

In a separate report on April 14, the central bank said credit expanded 4.5 percent in March compared with a year earlier. The average interest rate on new loans rolled out to companies rose to 3.4 percent in February from 3.3 percent in January, matching a record low first reached in March 2015.

“While we anticipate that the Polish economy will expand, the zloty’s depreciation against most foreign currencies has weakened the private sector’s capacity to service its foreign currency-denominated debt,” Standard & Poor’s said Thursday in a report on banks in Central and Eastern Europe. “Added to this, various banking reforms are exerting negative pressure on Polish banks’ past long-lasting and solid profitability.”

The zloty fell 0.9 percent to 4.3062 per euro at 5:06 p.m. in Warsaw, extending its drop this month to 1.5 percent, the worst performance among 24 emerging-market peers tracked by Bloomberg. The currency fell to a four-year low against the common currency in January, after S&P unexpectedly downgraded the sovereign, citing concerns over the independence of its institutions under the rule of the new government.

Hungary Memory

The bank tax has drawn comparisons with similar measures implemented in Hungary where Prime Minister Viktor Orban’s government imposed a levy on lenders and made banks bear the costs of converting mortgages denominated in foreign currencies into forint. The policy resulted in bank losses and led to a deterioration in lending capacity before the Hungarian government reduced the tax to 0.24 percent of total assets this year from 0.53 percent in 2015.

“The government may have a similar problem with credit as Hungary,” Jaroslaw Janecki, the chief economist at Societe Generale SA’s Polish unit, said by e-mail on Tuesday.

Crowding Out

By exempting its own bonds from the bank-asset tax, the government has helped boost demand for sovereign debt, driving down the yield on the two-year note to a record 1.35 percent this year. The rate climbed three basis points to 1.51 percent today. Local lenders have eclipsed foreign investors as the biggest holders of zloty bonds for the first time since 2010.

“The future will show if we are seeing some sort of crowding out effect and the government will be forced to seek measures to alleviate credit slowdown,” Robert Hryciuk, the head of interest-rate trading at BNP Paribas SA’s Polish unit, said by e-mail on Tuesday.

While Poland’s Deputy Prime Minister Mateusz Morawiecki has said the government may consider watering down the bank tax, reducing the burden on corporate loans, Societe Generale’s Janecki said he doubts the levy will be changed any time soon.

“For now the government won’t be inclined to change the scale of the tax, because it would result in lower budget revenue," he said.

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