The Big Squeeze
That, in its turn, will contribute to higher government spending on social relief projects and higher costs of servicing debt, thereby creating a vicious circle.
As much as an international research firm may praise this country as an FDI destination, financial markets do not seem so sure about the economy's prospects. The announcement of next year's budget, coupled with negative pronouncements coming from economic policy decision-makers, resulted in both the local currency and securities taking the plunge last week.
According to Jan Winiecki, chief economist at West LB, investors are worried about the increased borrowing needs of the government and the possibility of a U-turn in monetary policy, which could be delivered by a less-independent Monetary Policy Council (RPP) next year. Winiecki said that recent remarks by Witold Orłowski, the President's economic adviser, suggest that the RPP is likely to change course after a new membership is elected. The most worrying news, however, is that the government's increased borrowing needs are likely to push up interest rates next year and squeeze the corporate sector out of the market for loans.
Limited availability and the high cost of commercial credit have been among the most serious problems facing the country's corporate sector. Nearly one half of all companies that approached banks for loans in the first half of the year were met with rejection. On a brighter note, the cost of finance has been steadily, if slowly, falling. That, however, is bound to change next year with an increased demand for funds from the government, driving interest rates up and pushing the corporate sector out of the market for commercial loans.
Setting aside the political issue of "creative accounting," which sees next year's budget deficit understated by as much as zł.15 billion, or a third of the total, economists are more concerned about the rising government demand for loans needed to bridge the gaping budget hole.
"The only way to finance the deficit is by putting up interest rates on government securities, which will in turn affect the market rate," says Krzysztof Rybiński, chief economist at BPH PBK. "That is very bad news for the private sector." He highlighted the case of the tender for a zł.2.4 billion loan to the Labor Fund (FP), which now guarantees returns 50 percent higher than the standard WIBOR interbank offered rate.
"Lending to the government, even this one, is always less risky than to companies," Rybiński says. "This is a classic example of the government elbowing companies out of the market for commercial credit. And the government has pretty strong elbows."
The official figure for extra government borrowing next year is around zł.20 billion, but experts give little credence to this number. Rybiński estimates the actual increase as at least 6 billion higher than that, adding that the total could amount to as much as zł.28 billion. The private sector, he says, will come up against tough competition for loans, which will in turn result in increased cost financing for projects.
"The upshot of all this is that we'll see hindered investment, economic growth and job creation," Rybiński says. That, in its turn, will contribute to higher government spending on social relief projects and higher costs of servicing debt, thereby creating a vicious circle.
Jan Winiecki points to another undesirable consequence of the large public sector demand for loans.
"The most basic tool of monetary policy, that is the central bank's interest rates, is less effective in this country than it is elsewhere," Winiecki says. The effect of lowering interest rates is blunted by the government flooding the market with fixed-income securities. This trend is likely to deepen next year.
"This is the least political budget we've had in years," Rybiński says in words that sound as a grim reminder of certain bleak realities: the assumed exchange rate and unemployment figures are both politically motivated, he says. In addition, the 3.7 percent annualized average interest rate is assumed.
"Only a politicized Monetary Policy Council (RPP) can deliver this," Rybiński says. In a likely scenario, the new council, whose term starts on January 1 of next year, could lower the basic interest rate under political pressure. That, however, is likely to affect interest on two-week loans, while long-term credit would remain expensive due to the existing alternatives in the form of government bonds and fears of an inflationary pressure.
"The source of finance for private-sector investment is going to be even drier," he concluded.
The finance ministry declined to comment for this story.
