Economic forecast bright, but trade imbalances cloud horizon
Analysts are bullish on this year's economic prospects compared to last year, and forecast lower inflation, a stronger currency and rising gross domestic product (GDP). But pitfalls remain especially with regard to consumption levels and the current account gap, they said.
"It will certainly be better than 1999," said Krzysztof Rybinski, chief economist at ING Barings. "But there's one risk: the current account deficit."
Last year was a bleak one for the economy, with inflation hitting 9.2% in November, and the zloty weakening to zl. 4.11 against the dollar from a strong start at the beginning 1998 at zl. 3.45, according to Citibank (Poland). In addition, last year's GDP growth is expected to come in at only 3.7-3.8%, missing its 5% target. Moreover, evidence of 1999's worsening deficit in the current account, a measure of trade flows, came last week when November's statistics were released and showed the gap had broadened to $9.99 billion in the January to November period, and was approaching $11 billion by year-end. Citibank forecast the current account deficit would run about 7.3% of GDP against 4.3% in 1998.
But analysts said an overall economic upturn this year was just around the corner. Rising inflation, last year's overriding problem, is expected to continue into February, hitting the 10.5% mark, they said. But a reverse will come in March or April onward, and the sharpest drop should occur in the third quarter with inflation on target for 7% before the end of the year. That would bring inflation more in line with the government's 5.4-6.8% range, and the drop would mainly result from last November's 2.5-3.5% interest rate rise, Rybinski said.
Other analysts were skeptical as to whether the target can be met. "Inflation will stabilize at a lower level, but (this figure) is too ambitious, too early," said Bohdan Wyznikiewicz, senior researcher at the Institute for Market Economics. The increases in fuel and food prices responsible for 1999's spiraling inflation won't disappear, but rather are expected to slow compared to last year, analysts said. While excise taxes on oil last year rose some 30%, this year's taxes are forecast to rise by only 16%, Rybinski said.
But the government will also have to tighten its belt on farming bailouts that prompted last year's rise in food prices and inflation, in addition to widening the budget deficit, said Mariusz Pypec, an analyst at CA IB Securities. The Monetary Policy Council (RPP) consistently stated last year that the government should stop such handouts, Pypec said. "If (it) gives donations to one social group, the next will start to protest for (them), it's very inflationary," he said.
In addition, the fiscal strain of last year's bailout efforts in financing pension reform and the Social Insurance Office (ZUS) should lessen, analysts said. "We don't expect anymore nasty surprises (from ZUS)," Rybinski said. The budget deficit now stands at 2.3% of GDP for this year having taken into account all of ZUS's demands, he said.
But some analysts warned ZUS may still be a wildcard. "The financial problems of ZUS may continue," Pypec said. With decisions still pending on improving its operations, ZUS may require more money to pay for overhead as well as for the first-pillar pension funds, both of which have been financed by the national budget. Should more bailouts be necessary, the budget and public finance sector deficits would fuel increases in consumption, and thus, inflation, Pypec said.
Interest rates are likely to gyrate as monetary authorities attempt to keep inflation in check, analysts said. The council will likely hike interest rates 1% in the first six months, before cutting rates by up to 150 basis points, or 1.5%, in the second half of the year, Pypec said. The National Bank of Poland (NBP), with its primary aim to bring inflation down, will maintain a very restrictive monetary policy, he said.
Possible rate cuts later this year should come alongside the liquidation of the currency band and the scheduled elimination of the crawling peg, said Pypec. Currently, the NBP devalues the zloty at 0.3% a month, he said. Eliminating the crawling peg and opening the currency to a free float would give international investors more lucrative zloty-denominated positions, he said.
Given the zloty's weakening last year, the government is hesitant about the move, which it is obliged to make under an agreement with the Organization for Economic Cooperation and Development (OECD), Pypec said. But it must happen, he added. "There will be a revolution on the currency market," Pypec said. Liquidation will occur this year, definitely, he said.
Lifting the central bank's obligatory intervention rate could bring increased foreign investment and strengthen the zloty, some analysts said. And on the back of a forecasted strong euro, the currency could strengthen to zl. 3.8-3.9 to the dollar by year's end, Rybinski said.
Analysts are also forecasting GDP growth of 5.2% by the end of the year. Growth will be tied to a rebound in the German economy, Poland's main trading partner, and an increased demand for Polish exports, according to Pypec. Evidence of the rebound came in October when exports rose $200 million, he said. "If the economy in the European Union (EU) gets better, in Poland it will be better," Pypec said.
But rising consumption is on the agenda too, fueled by increases in consumer credit, and that will likely eat into gains in the current account, analysts said. "The current account deficit must be watched very carefully," Rybinski said.
The current account deficit for 2000 is presently forecast at 6.8% of GDP, against last year's 7.3%, according to Citibank (Poland). The optimism is fueled by an expected 7.5% growth in exports against a 6% rise in imports for the year, analysts said. The forecast trade balance is vastly different compared to the first 11 months of 1999 when exports were down 13% and imports down 7.3% compared to the same period in 1998, according to Citibank figures.
Tighter monetary and fiscal policy this year will lessen the risk of a widening current account deficit, Rybinski said. But that won't eliminate the problem, and "if Poland is too popular, and capital and portfolio inflows start pouring in, we could have a much higher deficit," he said. A flood of foreign investment could turn around and fuel spending on imports, he said.
