C/A deficit shows trade imbalance growing
The long-awaited current account (C/A) deficit for March, a strong economic indicator, shows Poland's export imbalance against imports to be at $1.43 billion, worse than the expected $1.1 billion-$1.2 billion.
Analysts said foreign debt repayment in March of $240 million-$340 million a twice-yearly occurrence likely pushed the deficit higher than forecasts anticipated. February's deficit came in at $954 million and the combined C/A shortfall for 2000 has grown to $3.59 billion.
The March figure takes the deficit from 7.8% to between 8.25% and 8.5% of gross domestic product (GDP), said James Owen, an analyst with SG Bank. "It's a very high number," Owen said, but "it can be financed at the moment."
Hypothetically, if the gap were to continue widening over a period of time, Owen said, "there would be a loss of confidence in the zloty and the zloty would fall."
Though exports in March picked up by $336 million from February and brought in $2.37 billion, imports, which cost Polish consumers $3.61 billion, grew $436 million from February.
"It does look as though Polish exports are growing significantly more quickly than they were last year," Owen said about the monthly growth levels. Though figures released by the National Bank of Poland (NBP) and the Central Statistical Office (GUS) aren't always complementary, he said, GUS figures show exports in the period of January and February 2000 up 5.7% from the same period last year. They were also up 3.5% year-on-year in the fourth quarter of 1999.
An NBP comparison of exports in the first three months of 2000 against the same period last year, however, shows exports down 9.7% and has some analysts lamenting a grim outlook.
But, noted Owen, "I don't think that is the case. I think Polish exports are beginning to grow."
Recent Eurostat statistics support this view, he said, showing an annual 31% Polish export growth in January against 29% in the Czech Republic and 21% in Hungary.
Marcin Mroz, an economist with Wood & Co. brokerage, also sees promise in March's 16.7% increase in exports from February, but doesn't believe continued export growth will solve the C/A deficit by itself.
"Polish exports are structurally weak and very vulnerable to external factors," Mroz said, mentioning as external factors foreign demand for Poland's sometimes low-quality exports and exchange rates. Also, "I do not think that even in the case of growing exports it will stir a drop in interest rates. Only the stabilization of imports may guarantee that the C/A deficit will improve in the medium term."
Mroz doesn't see any indications that domestic demand has slowed, but Owen believes high interest rates and a slowdown in earnings growth are keeping it under control. Consumer spending looked especially high in March, Owen said, because car sales were high as new car buyers rushed to beat the mid-March deadline affecting a hike in vehicle excise taxes.
Maciej Reluga, an ING Barings economist, said several other indicators support the viewpoint that consumer demand hasn't yet slowed. Wages were up 13.5% in April, he said, which will add to Poles' purchasing power. April inflation will also show up high, he said, down only to 10.1-10.2% from March's 10.3%.
ING expects the C/A deficit to occupy 7.2% of GDP by year's end amidst 5.2% actual growth in GDP. First quarter figures for GDP growth in 2000 due out at the end of May should show 6.2% growth and will set the record straight about whether or not exports have been a substantial factor, Reluga said.
The zloty, which has been losing value since its April 12 free float, also reacted to C/A news, falling to 4.72 to the dollar during Friday trading. It was also weak against a historically weak euro, at 4.24.
In light of this, the Monetary Policy Council (RPP) will hold an unexpected meeting May 8 to discuss interest rate and forex policies.
Wood & Co.'s Mroz said that although a weak currency usually bodes well for exporters, "the positive impact will be limited because only a part of the exports are invoiced in dollars."
Mroz expects the C/A deficit to gradually fall in coming months, but said monetary authorities, though not wanting to raise interest rates further, could be forced to do so if imports pick up too rapidly before that happens.
"I think the future of imports is a big question mark," he said. For the time being, however, he said, the surplus on Poland's capital account will provide a stable source of financing for the C/A gap. In March, Mroz said, almost $1.1 billion in foreign direct investment (FDI) and portfolio investment was added to the capital account.
