Poland bucks recession as neighbours struggle

13th July 2009, Comments 0 comments

The largest 2004 ex-communist EU entrant escaped the boom-bust cycle that drove once flourishing neighbours like Latvia and Hungary to the brink of default as the global crisis burst credit bubbles.

Warsaw -- Poland, the only EU state to record growth this year, may yet slide into recession, but experts say its large market, low export dependence and legacy of astute monetary and fiscal policy will keep any slump shallow.

"Poland has come into this crisis in a rather stronger position than a number of other countries," IMF economist Mark Allen told AFP.

The largest 2004 ex-communist EU entrant escaped the boom-bust cycle that drove once flourishing neighbours like Latvia and Hungary to the brink of default as the global crisis burst credit bubbles.

"The rate of credit expansion here was much slower than in a number of other countries and there was not the same asset price boom," Allen observed.

"Fiscal policy has stayed quite restrained in Poland and so we also haven't seen the expansion of the fiscal deficit we saw elsewhere," he said.

Among others, Allen credits Leszek Balcerowicz, Poland's free market guru, who served as central bank chief from 2000-2007 for a tight anti-inflationary policy that "kept the lid on the boom."

"As McChesney Martin said: 'The role of a central banker is to take away the punch bowl just as the party is getting going'," Allen said, referring to William McChesney Martin, Jr., the 1951-70 US Federal Reserve chairman.

Foreign investment, steady demand on Poland's large domestic market and its relatively low dependence on foreign markets also make it less vulnerable to diving exports, experts say.

Exports generate some 40 percent of Poland's gross domestic product (GDP), compared to over 70 percent for the smaller Czech Republic.

Massive cash injections stemming from EU entry also buoyed Poland's GDP.

The nation of 38 million absorbed a net 14 billion euros (18.6 billion dollars) in EU subsides between 2004-2009 and is allotted 68 billion euros (90 billion dollars) for 2007-2013, a government report said.

The drastic depreciation of Poland's free floating currency since July 2008 proved a boon to exports.

"There has been a 30 percent weakening of the zloty and that has been a tremendous shock absorber in terms of Poland's exports, they are not doing that bad," Danske Bank's Lars Christensen told AFP.

"It's probably one of the reasons why we are beginning to see stabilisation in Polish industry."

All, however, is not as rosy as it could be.

This week the European Commission launched an excessive deficit procedure against Warsaw after Poland raised the 2009 deficit as the crisis siphoned revenues.

Under EU rules, national public deficits are not to exceed 3.0 percent of gross domestic product (GDP).

Balcerowicz, the father of Poland's successful early 1990s "shock therapy" transition from communism to the free market, implored Warsaw to rein-in spending with deep structural reforms or risk a ballooning debt.

"Polish public finances have been ailing for years," he told Polish Radio recently.

"The way to heal them is to limit spending via reform, otherwise Poland will never quickly catch up with the West and will always have this huge fiscal weight and deficit."

Poland recorded first quarter growth of 0.4 percent, the only EU state to enjoy expansion this year.

Its governing liberals expect GDP to grow by 0.2 percent in 2009 after 4.6 percent growth in 2008.

The World Bank and IMF agree 2010 is likely to see a 1.0 percent expansion, but disagree on 2009.

While the latter expects slight growth, the IMF has forecast a 0.5 contraction.

Expecting 2009 GDP to shrink by 4.0 percent across the 27-member EU, the European Commission predicts 1.4 percent shrinkage for Poland.

Compared to its fellow 2004 EU entrants and chief trade partner Germany, this worst-case scenario is cheery.

The commission signalled GDP will contract by 2.6 and 2.7 percent respectively in Slovakia and the Czech Republic, while Hungary will slide by 5.4 percent.

The once-booming ex-Soviet Baltic states of Estonia, Latvia and Lithuania are bracing for jaw-dropping 15-18 percent GDP contractions.

Germany, the EU's largest economy, faces a six percent 2009 GDP slump.

Experts say Poland's performance will depend much on Germany's pace of recovery and whether unemployment, now 10.7 percent and due to spike to 12.5 percent in December, will dampen private consumption.

"Whether Poland is in the plus or minus category depends to a pretty large extent on how things are doing outside," the IMF's Allen said.

"None of us are that confident that we know whether it's going to be slightly up or slightly down, what we do know is that the numbers look a lot better in Poland than they do in most countries in the region."


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