Fed Taper Delay Allows Polish Bond Push, Rostowski SaysDavid McQuaid
Poland can push ahead with plans to cover much of its 2014 borrowing needs in the next few months as the U.S. Federal Reserve delays cutting back its bond purchases, Finance Minister Jacek Rostowski said.
“From the point of view of Poland, it will be helpful,” Rostowski said in an interview Oct. 18, a day after Poland sold 700 million euros ($958 million) of 2019 bonds at the lowest spread over mid-swaps since 2008. “The present situation, with the issue of the U.S. debt ceiling delayed but not resolved, is likely to cause a period of relatively low yields.”
Rostowski, 62, has been finance minster for six years, twice as long as any predecessor since 1989, and helped Poland become the only European Union member to avoid a recession since 2008. He declined to address speculation that the ruling party’s falling popularity has put his job in jeopardy, a claim that Prime Minister Donald Tusk has denied.
Tusk promoted Rostowski to deputy premier in February to stress the government’s focus on fiscal discipline and economic growth. The backdrop is an economy poised to grow at its weakest pace since at least 1997, which led to a tax-revenue shortfall and forced Rostowski to announce a deficit overshoot for 2013, triggering talk in August that his job may be at risk.
With polls showing his party trailing opposition Law & Justice for the first time since 2007, Tusk said on Oct. 9 that he will shuffle his cabinet and announce a “new opening” in November. The premier denied he’s seeking a new finance minister, calling such reports “unprofessional” and “indecent.”
A draft bill to cancel government debt held by private pension funds has also angered voters. Both Tusk’s and Rostowski’s approval ratings dropped to all-time lows of 29 percent and 16 percent, respectively, in a poll published today by CBOS, a Warsaw-based researcher.
The plan isn’t, “as some people have misunderstood it to be,” a nationalization of private pension funds, Rostowski said. The assets come from mandatory contributions to the public system, and their transfer has added 18 percentage points of gross domestic product to public debt since 1998, he said.
“It’s obvious this is a burden that Polish public finances can’t shoulder and, more important, need not shoulder in the longer term,” Rostowski said. “The world economic crisis has now lasted for five years and the risks from public debt throughout the world have become very apparent.”
The pension-fund bill, if passed into law, will reduce public debt by 9.2 percentage points of GDP next year, according to government estimates. That would trim the country’s debt ratio to 50 percent of GDP in 2014, compared with 49 percent in the neighboring Czech Republic and an average 90 percent in the EU, according to the International Monetary Fund.
With that performance, the premium Poland pays on debt relative to the Czech Republic should narrow “with a certain delay” from 1.68 percentage points on Oct. 18, Rostowski said. The spread, which was at 1.83 percentage points today, has narrowed 16 basis points since details of the pension bill were announced on Oct. 11.
Poland raised 700 million euros last week from its first foreign-currency bond in nine months. The Finance Ministry paid 1.759 percent on the January 2019 notes, or 43 basis points above the benchmark mid-swap rate. That’s the narrowest spread Poland has obtained from international buyers since 2008, Rostowski said.
There’s “no reason to change” plans to use bond sales this year to pre-finance 2014 borrowing needs, while “front-loading” subsequent sales early next year, Rostowski said. By cutting debt and bond supply, the pension-fund overhaul strengthens the Finance Ministry’s hand, he said.
“On a net basis, we shall be in a much stronger position,” Rostowski said. “The bond ownership structure has changed toward long-term investors to such a degree that even a higher share of foreign investors doesn’t worry me too much.”
Poland’s economic growth will accelerate to 2.5 percent in 2014 from an estimated 1.5 percent this year, according to the government’s forecast. The country will benefit from a global recovery that should feed through to the euro area, Rostowski said.
“I prefer to be conservative in my predictions for next year, while remaining more hopeful,” he said.
One source of optimism has been the performance of exports, which may rise to almost 50 percent of GDP this year from 39 percent four years ago, Rostowski said. This is a “deep structural change” that shows increased competitiveness and has underpinned the zloty’s stability over the past 12 months, Rostowski said.
The zloty has lost 1.9 percent against the euro in the past 12 months, the fourth-best performance among 24 emerging-market currencies tracked by Bloomberg behind the Romanian leu, the Bulgarian lev and the South Korean won.
“You have to be good to have that kind of an increase in a big country -- and not in a recession and with shrinking domestic demand, but in a period of economic growth,” Rostowski said.
Poland will continue to work on reducing its “structural” budget deficit in 2014, “while at the same time allowing automatic stabilizers to work,” Rostowski said. Besides boosting public investment, the government wants to build a program of loan guarantees to small business, he said.
“What we’re going to be focusing on is strengthening the upswing over the next couple of years,” Rostowski said. “We still have a lot to do.”