Poland’s Flourishing Family Feuds
Polish financial assets continued to lag double-digit index bumps elsewhere, as the ruling Law and Justice Party with 40% opinion approval bid to solidify re-election support with an estimated 2% of GDP fiscal package including the “Family 500-plus” child subsidy promised in its original winning campaign. The giveaways sparked worry that the fiscal deficit could hit the Brussels warning 3% threshold after officials there have already suggested government punishment for alleged media and judiciary tampering. A lackluster result in the May European elections could prompt further spending, and under best case scenarios another victory would maintain only a thin majority, with current parliamentary control just over half of seats. Prime Minister Morawiecki and his team have been regularly embroiled in diplomatic tiffs and political scandals since the beginning of the year, including a dispute with Israel over World War II history, a generous severance bonus paid to his predecessor, and alleged bribery of the financial services regulation head. State pension increases were another component of the recent stimulus, as a private successor to the defunct post-independence system is due to roll out with compulsory large company participation but an uncertain timetable for creating new managers, and recordkeeping requirements, and portfolio guidelines, although the debt-equity balance will be more even as a possible Warsaw Stock Exchange catalyst.
The IMF’s February Article IV report underscored ambivalence as it noted the economic cycle likely peaked late in 2018 when growth was 5% on strong private consumption and public investment in contrast with persistent private weakness. The labor-intensive model is badly in need of productivity improvement with demographic and migration trends, as the job market remains tight. Inflation is on target, but capacity utilization is high and a new financial services tax will raise sector costs. Expansion this year will fall to the historical 3% range, and the 1% current account gap should slightly worsen. Credit growth overall is manageable, but is in double digits for local currency mortgages and small business lines through bank leasing affiliates. Unsecured bad consumer loans are 10% of the total, and while capital, liquidity and other ratios are sound the strategy of replacing foreign to ensure domestic majority ownership, so-called “re-Polonization,” is an overarching risk that may deter future cross-border business. Public debt should reduce to around 45% of GDP by end-decade with better tax compliance to offset social transfers.
The financial system has “pockets of vulnerability eves as previous foreign-currency mortgage exposure has faded. The supervision authority is resource-constrained and self-regulation poses conflict when assets are 40% under government direction. On the stock market it cannot fully protect minority shareholder rights, and pension fund oversight will also be tested under the new private regime. Banks stress testing under a separate assessment revealed limited adverse scenarios despite slipping profitability with across the board observance of Basel core principles. However clearer resolution powers and steps are in order, and the sizeable cooperative and credit union sector escaped detailed monitoring especially in relation to commercial bank overlap. Over 500 cooperatives is a large number, and credit unions often lack due capital. The government bond market stood at 625 billion zloty in 2017, but the corporate one is undeveloped with more trading, tax and placement modifications urges to join the fixed-income family.
