Thomas White Global Investing
Poland Stamp
October 1, 2009
A Postcard from Europe
Poland: Looming Budget Deficit Speeds Up Privatization Measures

Polish currency

The Polish central bank has warned that public debt might cross 55% of the GDP in 2010.

For a country that is often dwarfed by its bigger neighbors like Germany and Russia, Poland has done remarkably well. Showing resilience to the global downturn, the country has emerged from the carcass of the financial crisis with its reputation only enhanced. So when it appeared that all the hard work would be unraveled by prospects of an unwelcome budget deficit next year, the government pushed forward its ambitious privatization plan with renewed urgency.

Running from 2008 to 2011, Poland’s much-publicized four-year plan intends to privatize key sectors of the country’s state-owned industries. But earlier this year, the Polish Treasury proposed to accelerate the plan to raise around $12.8 billion through the sale of public or state-owned assets by the end of next year. The plan offers investors shares in around 740 state-owned entities from sectors including finance, power & utilities, chemical, engineering, metal, electronics, and transport and shipping. Among others, slated for the sale are copper miner Polska Miedz SA and refiner Grupa Lotos SA, as well as Telekomunikacja Polska SA and power companies Enea, Tauron, PGE, Energa and PAK.

The privatization initiative came into renewed focus on September 29, when the Polish government approved a $104 billion budget that includes an $18.5 billion deficit. With President Lech Kaczynski opposed to increasing taxes and slashing spending, there were few alternatives to contain the flood waters of the rising debt other than to fast-track the privatization process.

Yet, analysts are concerned that the government is perhaps being too optimistic, hoping not only for robust growth and a strengthening of the Polish currency, the zloty, but that the privatization plan will help in bring the desperately needed revenue. Many question if fast-forwarding privatization might result in Poland being forced to accept lower prices for its state assets.

Finance Minister Jacek Roskowski, on his part, is not unduly worried, expecting Poland to ‘consistently lessen’ the deficit from 2011. His optimism is not entirely unfounded. As mentioned earlier, Poland has done well during this global downturn – gross domestic product rose 0.8% year-on-year in the first quarter and 1.1% in the second quarter. The Polish economy is anticipated to continue this expansion for the rest of the year and is expected to register 1% growth in 2009, making this year its 14th consecutive year of growth. Much of the country’s debt is held in foreign currencies, but the zloty has indeed appreciated in recent weeks, reinforcing Roskowski plans.

In the end, neither excessive optimism nor excessive worry will help erase Poland’s budget deficit. Prime Minister Donald Tusk perhaps said it best when he told Forbes that the budget only ensures a ‘safe passage through the storm.’ Going by that, stormy as this downturn has been, Poland has shown her counterparts in Europe just how to manage it.

* Disclaimer: As of September 30, 2009, Thomas White International, Ltd. held securities of Polska Miedz SA and Grupa Lotos SA in one or more of the portfolios managed by the firm. Thomas White International, Ltd. does not hold any securities of any other company mentioned above in any of the portfolios managed by the firm.


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