Citigroup to ING See Silver Lining in Poland's Budget Shortfall

  • Cabinet calls to raise 2015 deficit by up to 4 billion zloty
  • Move to help meet EU budget gap target of 3%/GDP next year

A surprise increase in this year’s budget deficit doesn’t have to be bad news for holders of Poland’s government bonds.

Finance Minister Pawel Szalamacha said Friday he would increase the 2015 shortfall by as much as 4 billion zloty ($1 billion) in an “emergency” revision caused by lower-than-expected tax receipts. While bonds fell for the first time in five days on Monday after the announcement, the move is neutral for the debt market as the new cabinet probably decided to push back some non-tax revenue or bring forward expenditures to create room to meet campaign promises, according to Piotr Kalisz at Citigroup Inc.

The government, which was elected in October on plans to increase public spending, likely wants to level out deficits for this year and next to meet European Union targets and avoid endangering access to funding, according to ING Groep NV. Poland must find cash for as much as 30 billion zloty in new budget spending next year, Deputy Prime Minister Mateusz Morawiecki told Do Rzeczy magazine on Monday.

“It looks as if this is just shuffling of expenditure and revenue between 2015 and 2016,” said Citigroup’s Kalisz said. “The amount of bonds issued over the next year and a half will be the same.”

The yield on Poland’s 10-year securities was little changed at 2.68 percent at 4:41 p.m. in Warsaw. That left the premium investors demand to own Polish debt over similar-maturity German bunds little changed near a one-week high of 221 basis points and within six basis points of the highest in almost two months reached on Nov. 9.

The budget gap, set by the previous cabinet at 46.1 billion zloty, will widen by 3 billion zloty to 4 billion zloty as revenue from taxes, mainly the value-added tax, is running 12 billion zloty short of the plan, the Finance Ministry said last week. Szalamacha refined the shortfall estimate to 3.8 billion to 3.9 billion zloty in an article published by Rzeczpospolita on Tuesday. He told the daily he wanted to stay within the EU deficit limit of 3 percent of gross domestic product, though there could be an event that sends it above.

The revision won’t affect issuance as Poland has more than offset the increase with improved liquidity management in its public finances, Piotr Marczak, head of the ministry’s public debt department, said on Monday.

The budget has a revenue shortfall of 10.4 billion zloty this year, the government said in an e-mailed statement after its meeting on Tuesday. It will hold a press conference on this year’s budget on Wednesday.

The move to increase the 2015 deficit was probably designed to help the government adhere to the EU deficit limit, said Jakub Rybacki, an economist at ING’s Polish unit. Poland exited the EU’s so-called excessive deficit procedure this year after the Civic Platform-led government pledged to narrow the gap to 2.8 percent of GDP this year and next.

“This move should help keep next year’s budget deficit in check,” Rybacki said on Monday.

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