Inflation drops for second month, but analysts remain cautious
Inflation in April dropped for the second consecutive month to a year-on-year figure of 9.8% from 10.3% annually in March.
Despite predictions by analysts that Poland could be facing tough times as the current account (C/A) deficit continues to rise above its present level of 8.3% of gross domestic product (GDP), most reject the idea of an imminent currency crisis.
Also helping allay fears was the latest revision by the rating agency Standard & Poor's last week, which upgraded Poland's sovereign debt rating from BBB to BBB plus and its local currency debt rating from A to A plus.
As an indication that successful pension, administrative, health and education reforms in 1999 triggered the revision, S&P also revised its outlook on both foreign and local currency ratings from positive to stable.
As a result of the S&P upgrade, Poland's economy is now rated on an equal footing with Hungary, viewed as the most dynamic economy in the region. Also Polish companies will now be able to borrow money abroad at lower interest rates.
"It's nice because when you see the rest of the investment banks becoming more pessimistic ... the S&P's confident that the long-term outlook for Poland is very positive," said Grzegorz Latala, head of research at Raiffeisen Capital & Investment Polska.
He said another positive sign was that the Polish economy was becoming more independent of political issues, distancing itself from the instability of the government.
Despite falling inflation, Latala warned not to overestimate the April results with dry weather already threatening a reduction in crops causing potential price hikes.
Although declining annually, consumer prices in April increased by 0.4% from March. Food prices were up a monthly 0.8% or 9.3% annually since last April. Prices paid for services rose only 0.4% or 10.1% from last year.
"Nobody expected inflation would go below 10%," said Katarzyna Zajdel, an economist with Citibank (Poland). But she said the current figure was a relief for the markets.
The Monetary Policy Council (RPP) did not raise interest rates during its May 17 meeting and is due to meet again on May 24. Key interest rates are currently at 17.5-21.5% following a rise of 450 basis points in the past six months. The high rates are believed to be having the desired effect on the low 0.9% growth of money supply in April and inflation, which Citibank expects to end the year at an annual 7.5%, outside the government's target of 5.4-6.8%.
Citibank recently revised that figure from 6.7%, Zajdel said, partly because of the drought that had affected food prices and also because of recent increases in fuel prices. Citibank also expects the C/A deficit to loom over the economy at dangerous levels for several years just above 8% of GDP at the end of the year and just below 8% at the end of 2001 which could lead to a devaluation of the zloty.
Zajdel said that if a serious financial crisis did hit the economy it would not be on the scale of events in Brazil or Thailand, but she said it would still impact the economy.
However, Amerbank's head of research, Jacek Wisniewski, was pessimistic saying a currency crisis, in which banks and businesses go bankrupt and currency becomes worthless, could occur within two years if a prolonged C/A gap continued to shatter investor faith.
"We can't live with such a high imbalance in the economy," he said. "We'll have to pay so much for imports and there's not enough dollars in the central bank to pay it."
Currency crises are normally spurred by a bank collapse or "something spectacular" like a political crisis, Wisniewski said. The government, expected to release 2001 budget plans this week, will need to tighten fiscal policies, starting with public sector deficits, to protect the economy, he said.
As long as the zloty stays in its current range, however, it's where it needs to be to make exports attractive, Raiffeisen's Latala said. "This is just fine. Let's leave it at the level it's at now," he said. "I would say that another 5% decline from today's level (4.4%) would be desired."
For now, continuing privatization should help bolster the economy and keep the zloty relatively stable, especially with the upcoming sale of 35% of Poland's flagship enterprise, Telekomunikacja Polska (TPSA). But, as Wisniewski said: "How many TPSA's do we have? Only one."
Zajdel said another danger to the currency would be if TPSA privatization revenue was placed in a special hard currency account, which the government has threatened to do.
