Official wants revised 2000 inflation target; rate hikes forecast
Next year's extra zl. 3 billion ($712 million) government handout announced last week to bailout the Social Insurance Office (ZUS) won't necessarily have a significant inflationary effect if spent on private pension funds, analysts said last week.
But overall increased government spending on ZUS and other social sectors, indicating lax fiscal policy, may well prompt the Monetary Policy Council (RPP) to raise interest rates an extra 1% to curb rising double-digit inflation in the first quarter of next year, analysts said.
"The rates may be hiked again to stop inflationary pressure," said Mariusz Pypec, an analyst for CA IB Securities. "It is quite probable if the government (continues) giving donations to various social groups."
The Finance Ministry's decision last week to grant the ZUS payment, pushing the 2000 budget deficit up to 2.2% of gross domestic product (GDP) from its former 1.9% level, is contrary to the RPP's intention of controlling expenditures to hit next year's inflation target of 5.4-6.8%, Pypec said. Inflation is on course for 9-10% by the end of the year, and if it hits 12% in the first quarter of next year, then a 100 basis-point rise is in the cards, he said.
Already, the government has acknowledged that meeting the average inflationary target of 5.7% next year will be a tough call. Deputy Finance Minister Jaroslaw Bauc said last week the 5.7% forecast must be updated. But he did not say by how much, other than noting that 7.5% would be too high.
Analysts were cautious over the effect of the ZUS payment, which comes on the heels of a zl. 14 billion ($3.59 billion) bailout already earmarked for ZUS in next year's budget.
Deputy Prime Minister and Finance Minster Leszek Balcerowicz has assured that the latest subsidy, used to fill the hole left by companies that have not paid their taxes, will be transferred to private pension funds. If that remains the case, the inflationary effect will be dampened as compared to government spending on overhead and the monthly pension-payment system, said Krzysztof Rybinski, chief economist at ING Barings.
"It is not necessarily bad, and not as bad as it would be if it were a result of the first pillar shortfall," which would be pure fiscal expansion, he said.
The first pillar refers to the existing pay-as-you-go scheme, the traditional approach to funding social security through taxation that does not capitalize funds through investment. The latter is part of the second pillar of pension reform that began this year.
Government spending on the second pillar would supply increased capital for private-sector investment instead of consumer spending. However, it could also fuel inflation if privately managed funds buy debt from banks in the form of bonds, analysts said. Banks could turn the proceeds around to increase consumer credit, pushing up inflation and the current-account deficit through increased consumer spending, analysts said.
In addition, this may not be the last handout for ZUS in the coming year, analysts warned. "ZUS is still a big question mark and it depends on whether enterprises keep avoiding paying contributions next year," Rybinski said.
But with ZUS having spent zl. 4 billion ($1.03 billion) of a budgetary loan this year on current pension and rent payments instead of servicing its debt load to commercial banks as had been hoped for, "there is a great risk ZUS will have financial troubles next year," Pypec said. "All donations may be spent on actual and current payments."
Also fueling inflation fears and the probability of further interest rate hikes next year is the potential for increased government spending in the health and coal sectors, now undergoing restructuring and layoffs.
Health-sector spending accounted for about one-fifth of budget deficit spending in recent years. The government's recent decision to grant the sector a zl. 1 billion ($256.41 million) loan is already shaping up as negative, analysts said.
"This is a very bad signal to taxpayers," Rybinski said. Previous loans were transformed into subsidies and costs covered by taxpayers, so there's little assurance of any hard budget constraint in the sector, he said. The situation is worsened by the parliamentary health committee clamoring for an extra zl. 2 billion ($512.82 million) on top of the existing loan, he said.
Further pressure for government spending can also be expected from miners as the Economy Ministry continues with its restructuring of the coal sector. In closing down some of the nation's ailing coalmines, the government has offered retraining programs for those hit by pit closures, or a zl. 50,000 payoff to get out of the business altogether. And while the World Bank is financing part of the reform, the government has had to raise an extra zl. 400 million ($102.56 million) to cover the much greater-than-expected demand of those who want to leave.
"The miners don't want the active forms of restructuring, they want the passive forms," Rybinski said.
The one-time payoff may help calm waters in the near term, but sooner or later social unemployment ills will return demanding increased government spending, analysts said.
