According to initial estimates from the Polish Central Statistical Office (GUS), the government institution deficit will be at the relatively low level of 2.4% of the GDP. However, this information is only seemingly positive. Once you realize why the difference between national income and national expenses has decreased and compare it to estimates from the European Commission, you may come to the conclusion that the future doesn’t look bright. A commentary from Marcin Lipka, Cinkciarz.pl senior analyst.
Investments have decreased. Deficit will increase
2.4% of the GDP deficit is a very positive result, if you look at the national balance of income and expenses. However, it’s worth taking note that this has occurred in an environment of limited investments.
According to the Polish Press Agency, the Ministry of Finance claims that the value of investments went down from 37.22 billion PLN (2015) to 24.16 billion PLN (2016). This difference is approximately 0.7% of the GDP, which means that if development expenses had maintained the same level as in 2015, the deficit would most likely be larger than 3% of the GDP.
It’s also worth emphasizing that according to the European Commission’s (EC) forecasts from February, Poland’s budget deficit for 2018 will be at the level of 3% of the GDP. This is the third worst result in the entire EU (the average is at the level of 1.6%). Nevertheless, this is not the worst information.
According to the Debt Sustainability Monitor (DSM), the structural problems of Poland’s finance are much more serious. They can significantly increase the country’s financing costs in the forthcoming years. Moreover, Poland’s rating may be endangered and the zloty exchange rate would be determined even more by the global investment sentiment.
Poland’s situation may deteriorate significantly
The DSM report from the beginning of 2016 indicated that Poland’s situation is slightly deteriorating. The level of debt against the GDP was estimated to increase up to 62.5% by approximately 2026. Moreover, the country’s structural deficit was estimated to remain below 3% until 2020, only to reach the level of 4.2% in 2026.
However, this year’s revision of the DSM report shows even worse forecasts from Poland. The structural deficit is estimated to reach 3.5% of the GDP in 2020. Moreover, forecasts state that in 2023 it will reach the level of 4% and in 2026 it will reach the level of 4.9%. As a result, the difference between debt and the GDP would be at the level of 69.2% in 2026. Even though forecasts that cover such large periods are burdened with a significant risk of error, they are used by foreign investors who buy Polish ten-year bonds.
The country’s position is also relatively significant regarding both rating and sustainability. This means that when the global situations are deteriorating, following such trends by a particular country is significantly dangerous. Moreover, it’s even worse when the condition of a particular region of a country is relatively stable and the country’s overall condition is deteriorating. Unfortunately, the latter example applies to Poland’s current situation.
The DSM indicates that in 2026, Poland’s structural deficit will be the highest in the European Union (4.9% of the GDP). To compare, the forecasts for Bulgaria, Hungary and Czech Republic are estimated to be at the level of 0.5%, 2.4% and 2.6%, respectively.
The significant deterioration of the annual balance between income and expenses, would basically result in the leveling of the debt to GDP index of Poland and Hungary (69.2% and 70.3%, respectively). Currently, Poland’s index is by 20 percentage points lower than Hungary’s.
If the above forecasts are fulfilled, it will be clear that the rating agencies would consider more downgrading of Poland’s rating, instead of leaving it unchanged. The real question is, will Poland’s credibility remain at the investment level? This would cause serious consequences for Poland’s investment abilities, the exchange rate of the zloty and life standard in Poland.