Author: Marek Pielach

Journalist at Obserwator Finansowy

Antczak: Let’s join the euro area, as we are already bearing the costs, after all

We are reducing the deficit because financial markets are very sensitive to its level, but we are not joining the euro area. Accordingly, we are losing the “umbrella” of the ECB, a chance for the economy to operate in the exchange rate-free environment and reduce borrowing costs for the government sector, business and households. This situation is bizarre — says Rafał Antczak, a Board Member of Deloitte.

Obserwator Finansowy: How long may the economic slowdown last in Poland?

Rafał Antczak: It is not easy to say how long, as we are in a period of uncertainty, similar to that seen at the very outset of the transition process of 1990-1991. As professional forecasters of economic indicators, we have not since tackled the situation in which Poland’s labour market is weakening, real and at the same time wages are dwindling, environment is inflationary, the zloty exchange rate is highly volatile and the situation of households is at risk. We know that some households face problems with debt repayment, and this coincides with a record low level of savings. Thus, whether next year’s GDP growth is higher or lower than 1.5 % will primarily hinge on households behavior. Little doubt, this ushers us into a very interesting period. It will require conducting a really decent economic policy.

Well,  may 1.5-2 % growth be a standard rate for Poland for many years?

We are not doomed to low growth. The Polish economy has still a large potential. The problem is that the public sector — inefficient as it is — hinders the economy. Let’s have a look at the tax system whose quality — according to the World Bank reports — is rated at the level of Dark Continent countries. By way of illustration, the call for deregulation is heard in any exposé of any Prime Minister, and that it the end of it. In such a reality, private businesses may endeavour to report excellent performance figures, but they have their back to the wall anyway. If we look at large businesses, the situation looks interesting in that these have accumulated record-high amounts of deposits. Yet for some reasons they do not want to use them to finance investments.

What I am saying may be overtly pessimist, yet given such a bleak picture the government should offer various scenarios and think of the instruments which can be applied rapidly and effectively. The point is that the government is not able to respond in that way. The only thing that the government administration can do in those difficult times is to increase taxes.

In your opinion, there may be two flywheels for the Polish economy. First, the broadband  Internet second, shale gas.

Those are just two examples of structural policy instruments which, in practice, can be numerous. Deloitte reports clearly indicate that if businesses with surplus cash could yield higher margins in new markets, then they would  launch investments. Here however we also face political and structural obstacles. How can one talk about creating a large market of  broadband Internet services in Poland, if it’s impossible to implement as trivial a thing as a prescription recording system, i.e. to put prescriptions online, and save it in the system after it has been prescribed by doctor, with the option of getting it filled by any pharmacy.

Things look slightly better for shale gas. We see a significant commitment of the State via the state-owned enterprises. Except that gas exploration is a mere beginning. In the United States, which has been successful in this area, the state administration has done two more things. It has strongly promoted infrastructure development — intra- and inter-state gas pipelines — and prohibited shale gas export, until the domestic market has been saturated. Therefore, the price of shale gas in the United States dropped below USD 100 per 1000m3, whereas in Poland gas costs five times as much. What about the effects of this policy? American investors are beginning to come back to the United States, after having fled to the Asian countries, among others due to high energy prices.

Is it possible that this happens in Poland?

Possibly, but all you need to is to adopt the American model. The State must deregulate the creation of the infrastructure, which should be built with private funds, yet its cost must be as low as possible for the business to invest. Poland has taken a smart step by merging the Polish Power Exchange and the Warsaw Stock Exchange, well yet again, it is only the first step. In the United States, the financial infrastructure, in the form of gas CFDs had been already in place before shale gas was made available.

In other words, the State creates opportunities first, then large international and Polish businesses invest, they subcontract smaller businesses and the economy is set in motion?

It tends to be a common pattern. Businesses invest where they can make profit. Meanwhile, if we look at the structure of capital inflows to Poland, according to balance of payments data, long-term capital, i.e. foreign direct investment, accounts for a mere one third of this figure, whereas two thirds are short-term capital, which flees as fast as it appears, and makes the zloty exchange rate volatile in the process. A reasonable economic policy is necessary to change it. In other words,  the State  should develop realistic plans and make the market implement them. This is what they are accountable for to their voters.

What has to be done first? The Deloitte reports show that the Internet’s contribution to Poland’s GDP may grow from current 4.8 % even to 13.1% in 2020, i.e. by PLN 246 billion. According to Orlen (crude oil refinery), investments in shale gas will at best push up GDP by 0.8 percentage points over 2019–2025 and generate tax receipts of PLN 87 billion.

Let’s not compare apples and oranges. Our report also indicates that the impact of the Internet on the economy will stand at about a tenth of a percentage point of GDP. This incremental increase will be low, probably lower than in the case of shale gas. But it also shows that we cannot abandon one policy in favour of another and we should come up with as many economic flywheels as possible. Well, there is no single simple remedy to solve all our problems and make everybody happy. This is no longer that stage of economic development.

Is it good that the State-owned companies are so much committed to shale gas exploration at a time when Exxon Mobil gives it up in Poland?

We must keep it mind that Exxon replaced gas exploration in Poland with oil exploration in Russia. The decision may have stemmed from pressure of a Russian partner. Russia has a vital interest in Poland not getting shale gas at lower prices. We are the second largest consumer of shale gas delivered by Gazprom, after Germany, and we pay for the gas very generously, so it is in the interest of Russia to keep the status quo.

It is true that there is pressure on companies in which the State Treasury has stakes, but they are also listed companies. Should this investment turn out to be unfortunate, the market will mercilessly verify the value of those companies; so for sure business plans must have been made, which indicated that this project would be feasible. Therefore, I don’t think it is something wrong that the State suggests tapping into other available resources, using foreign technology, which is exactly what governments in a number of numerous other countries do. Cheap energy has always been, and will always be, the key for economic growth.

Could the adoption of the euro become the third flywheel for our GDP? This is what you mean, though the common currency evokes all associations but economic growth.

This is an entirely different scope of policy than a structural policy. Indeed, we are repeatedly told that we benefit hugely from staying outside the euro area, yet those are half-truths,

Is it a half-truth that a weakening of the zloty spared us from the crisis?

We have been spared by something completely different — a more flexible labour market than in PIIGS countries (Portugal, Ireland, Italy, Greece, Spain — Editor’s comment) and low debt of Polish businesses which did not have to wind up when it came out that the banking market was frozen. In my opinion, a floating exchange rate does more harm than good to us. Let us refer back to currency options, which were a clear attempt at speculating against the zloty. First, its price was sharply driven up, and next brought down at the expense of businesses and households. A weak zloty by all means boosts exports, but on a short run. The performance of the German economy is much more important for the Polish exports, not the exchange rate.

And that’s why we should adopt the euro?

We should at least consider it seriously. The risks of staying outside the euro area are just materialising. Poland has no access whatsoever to financing from the European Central Bank. After all, the National Bank of Poland will not inject hundreds of billion zlotys in the economy or in the banking sector, should anything goes bad. The emerging banking union may deprive us of the control over domestic banks.

What’s more, if exchange rate volatility remains at the present level, and we have the same structure of inflowing capital, we can forget about stability. Poland is now attracting short-term capital, we are mostly funded by foreign investors and it is a very simple road to crisis if those investors rapidly flee from us. Apparently, the government is aware of it, as the IMF credit facility has not been requested for fun but in order to spare us from imbalances of the balance of payments. So where is that mythical benefit from the national currency and independent monetary and exchange rate policy?

You mention the disadvantages of not adopting the euro, but would there be any specific benefits of adopting it?

If we hide under that umbrella of the euro, we will gain a room for manoeuvre, which we are lacking now. At it will come out that loan costs of Polish businesses will drop abruptly, because the borrowing cost will diminish, and so will costs arising from exchange rate risk. Polish enterprises will be able to focus on what they do well — on labour efficiency and costs. If, as a euro area member, we didn’t make the same mistakes PIIGS countries had made, I mean heavy borrowing on low interest rates, then Poland’s entry into the euro area should be a very good idea. The point is that as a large portion of the public think that humans co-existed with dinosaurs, the same large portion of the public strongly believes that an entry into the euro area will result in a kind of Armageddon. It is a psychological issue.

So let me ask you on behalf of those who believe in Armageddon: how can we sustain our growth by joining the euro area, now teetering on the brink of recession?

In the same way Slovakia did in 2009 and Estonia in 2011. Latvia is scheduled to join the euro area in 2014. All those countries somehow do not complaint about entering the euro area during the crisis, and their economies, small as they are, and exposed to external trends are coping very well. Poland’s entry into the euro area, should it be within our reach, would immediately reduce the costs paid by the state, enterprises and households, alike. Interest cost, i.e. the costs on outstanding funds, would probably decline by at least 200 basis points, i.e. by PLN 10 billion pa for the budget-financed sector. The private sector costs would sink by another PLN 10 billion, as its debt level is fairly similar.

Our costs drop by not less than PLN 20 billion, for a start. Meanwhile, 1 percentage point of VAT amounts to PLN 5 billion, i.e. on the budget revenue side the euro area entry would produce the same effect as a 2 percentage point VAT increase. Additionally, the guarantee of a stable exchange rate, no risk to the banking system and the end of the zloty speculation game in the Polish market will also offer significant benefits. Those are the accounts no sane economist will question. Well, but vox populi, vox Dei.

There is a paradox of adopting the euro. In order to adopt a common currency and thus boost GDP, we would first have to comply with the convergence criteria, that is to contain the deficit, which would slow the present economic growth. Does it make sense?

We are in an even more absurd situation at the current juncture: we are lowering the deficit anyway, as financial markets are very sensitive to its level, yet we are not joining the euro area. We are going to meet the fiscal criteria soon, yet we remain outside the monetary union. However, the truth is that we have a problem with the two other criteria: price stability and exchange rate criteria. The former is strictly dependent on the latter. If it turned out that Poland joins the euro area and it is a reliable declaration, I bet on the scenario of the appreciation of the zloty, decline in inflation and compliance with these two criteria. After all, in current conditions, the two criteria could be subject to political bargaining. For the euro area, attracting quite a large Polish economy would represent a large gain in terms of prestige, so nobody would expect Poland to comply with the requirements up to a tenth of a percentage point, as it was the case for Lithuania.

If there is a political will — how long could the process take?

It seems to me that the shortest scenario would be a year and a half, maybe shorter. The situation is extraordinary now, but in such conditions political decisions are taken faster. Surely, behind closed doors one should sound Germany and France out about it. If it turns out that the topic attracts interest, it should be negotiated and then see what a possible result will be. We will not lose, anyway, and we can gain a large room for manoeuvre for the economy in the tough times to come.

By Marek Pielach


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