World Bank Plugs Poland’s Budget DeficitKonrad Krasuski
Poland is turning to international lenders to fund a growing budget deficit at loan rates that are lower than those available from debt markets.
The government is seeking 2 billion euros ($2.6 billion) in loans by Aug. 30 to show that “there is another option for financing than market auctions,” Deputy Finance Minister Wojciech Kowalczyk said last week. Poland is set to pay the equivalent of a 0.79 percent yield for an 18-year, 1 billion-euro facility from the World Bank, the lender’s website shows. That compares with 3.65 percent on Poland’s 2035 euro notes and 2.18 percent on German euro bonds maturing in 2031.
Prime Minister Donald Tusk, who also asked for help from the European Investment Bank, is facing a 2013 budget shortfall 45 percent bigger than earlier estimated amid the slowest economic growth since the 1990s. Poland had 52 billion zloty ($16.1 billion) in outstanding loans from the World Bank, the EIB and the Council of Europe Development Bank as of April 30, according to Finance Ministry data.
“Taking loans from international institutions makes sense when markets are less favorable and investors wonder how the government will finance the higher deficit,” Wojciech Labryga, who helps manage the equivalent of $3 billion at PKO Bank Polski SA’s pension fund in Warsaw, said by phone two days ago. “It can’t fully replace typical market financing, but demonstrates the government has different budget options.”
Loans from the World Bank and the EIB will help Poland cover about half the budget shortfall of 16 billion zloty that emerged as the economic downturn crimped revenue, Finance Ministry Chief Economist Ludwik Kotecki said yesterday.
The ministry had expected to meet 91 percent of this year’s borrowing needs by the end of July, which allowed it to suspend bond auctions until September, Piotr Marczak, director of the ministry’s debt department said last month.
Poland’s biggest backstop is a $33.8 billion flexible credit line from the International Monetary Fund, which was granted in 2009 and renewed in January 2013. The facility gives Poland a “safety umbrella” against the euro-area crisis and reassures foreign investors, Katarzyna Zajdel-Kurowska, a member of the central bank’s management board, said on April 3.
Poland will pay the World Bank 46 basis points, or 0.46 percentage point, over six-month Euribor for its second development-policy loan, which carries a 0.25 percent up-front fee and requires no payments for the first 5 1/2 years.
Hungary took a $1.41 billion loan from the World Bank to support its financial industry in September 2009.
“Loans from multilaterals are relatively small compared with the government’s financing needs,” Wojciech Szajner, head of debt trading at Societe Generale SA in Warsaw, said by phone yesterday. “The Finance Ministry is doing this to whet investors’ appetite for its next auctions. Market conditions remain the key, especially since they want to pre-finance as much of next year’s needs as possible.”
While the World Bank focuses on buttressing the government budget, project financing is being provided by the EIB, the European Union’s investment arm, and the European Bank for Reconstruction and Development. Together, the three institutions have funneled $2.7 billion to Polish companies and the government this year, compared with $7.4 billion in 2012, data on their websites show.
Energa SA, Poland’s fourth-largest utility, will be funding grid upgrades with a $310 million, 15-year loan from the EIB. The bank also agreed in May to lend 112 million euros to state-owned rail carrier PKP Intercity SA to buy Pendolino high-speed trains from Alstom SA.
The yield on the benchmark 10-year zloty bond declined one basis point to 3.92 percent at 12:27 p.m. in Warsaw while the zloty strengthened 0.1 percent to 4.2433 per euro. Poland’s credit-default swaps, contracts insuring the nation’s debt against default, fell two basis points to 89, data compiled by Bloomberg show.
In return for helping Poland “protect fiscal space for key growth-enhancing investments,” the World Bank expects the country to continue “strengthening public finances,” according to a description of the 1 billion-euro loan to Poland posted on the Washington-based lender’s website.
While Tusk increased the 2013 budget deficit this week, the World bank sees government “will” to lower the shortfall to around 3 percent of gross domestic product in 2014 and therefore “continues to lend,” Ewa Korczyc, a Warsaw-based World Bank economist, said in an e-mail reply to questions today.
“We aren’t giving up lending to Poland, especially during a downturn, and that will be reflected in the new strategy our management board will be discussing in August,” Korczyc said by phone on July 16. “It’s no wonder that Poland is taking advantage of these cheap loans, but they’re no substitute for market financing.”