Oh dear. Poland may have escaped the financial crisis with a positive GDP year to date, but that will not stop the country’s fiscal situation souring in the year to come, according to BNP Paribas emerging markets analyst Michal Dybula.
In fact, according to Dybula, Poland runs a real risk of coming to resemble Hungary circa 2002 - the year in which the latter country began to experience a bona fide fiscal collapse. Or as he puts it (our emphasis):
“The Pole and the Hungarian are two brothers” people say in both countries. But while the two may be brothers in fighting and drinking (as the original saying goes), they might also become brothers in terms of policy — and policy mistakes.
Since the spring we have been warning that Poland’s fiscal situation and outlook are starting to resemble those of Hungary in 2002. Our concerns have recently been picked up by Polish media, especially after it was confirmed that this year’s fiscal deficit will rise to above 6.0% of GDP, and public debt relative to GDP will breach the first safety level of 50%, causing the 2009 privatisation goal to be missed.
And it seems the comparison is also applicable to Poland’s current standing as emerging Europe’s golden child:
In 2002 it was Hungary who was praised as the regional growth champion, just as Poland is today (Chart 3). In 2001-2002 Hungarian GDP was rising by some two percentage points y/y faster than the average for the CE3 group (Poland, Hungary and the Czech Republic). This growth caused Hungarian policymakers to believe that they could afford large fiscal deficits.
Poland’s relative GDP growth in 2009 is even more impressive, especially since it will be the only EU country still posting a positive change in GDP this year. Despite this favourable backdrop, the government has opted not to tighten fiscal policy in 2010. The official explanation — that it would be premature to hike taxes or cut spending with the economic recovery still very fragile — might sound convincing. However, as with Hungary in 2003-2009, we expect that allowing for a significant rise in Polish public debt is a mistake that will have negative implications for growth over the next years.
And here’s the deficit development comparison in chart form:
All of which lead Dybula to conclude that nominal and real bond yields in Poland will inevitably track higher, having the effect of increasing risk premiums for the private sector and hurting growth.
Related links:
Poland facing another wobble after all - FT Alphaville
CEE’s stand against SPECTRE-lators - FT Alphaville
