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DE RUEHWR #0253/01 0681312
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P 091312Z MAR 09
FM AMEMBASSY WARSAW
TO RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 7934
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
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INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 03 WARSAW 000253 
 
SENSITIVE 
SIPDIS 
 
EUR FOR DAS GARBER, TOM YEAGER, JONATHAN KESSLER 
STATE PLS PASS USTR FOR D. MULLANEY 
NSC FOR KRISTINA KVIEN AND KATHERINE HELGERSON 
TREASURY FOR STEVE WINN 
COMMERCE FOR HILLEARY SMITH AND JAY BURGESS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PL
SUBJECT: POLAND'S ECONOMY HOLDS STEADY: FORTUNE FAVORS THE 
PREPARED 
 
REF: A. 08 WARSAW 1217 
     ¶B. WARSAW 191 
 
¶1.  (SBU) Summary.  Poland's economy is slowing amidst global 
weakness, but thanks to good timing and good policy, it is 
not in crisis.  Poles are sheltering behind the prudent 
fiscal, monetary, and regulatory policy of recent years; the 
relative immaturity of Poland's consumer credit market; and a 
banking system (mostly populated by European and U.S. parent 
banks) focused on the meat-and-potatoes work of developing an 
young domestic market rather than the exotic "search for 
yield" of global financial markets in recent years. 
Importantly, Poland's economic cycle was reaching a peak as 
Lehman Brothers collapsed in September 2008.  Imported 
weakness since then has - so far - helped to cool what 
appeared in the summer to be an overheating economy. 
 
¶2.  (SBU) With unpredictable externalities the rule of the 
day, Poles' assumptions about their own future are heavily 
caveated.  Assuming no external or internal shocks that cause 
significantly deeper credit contraction, economic observers 
here predict GDP growth between zero and two percent in 2009 
and unemployment rising moderately from its post-Communist 
low of 6.5 percent.  The GoP is hunkered down, using the same 
fiscally conservative approach that has protected Poland's 
economy thus far to see it through the crisis and position 
Poland to quickly recover, if not shine, once the global 
economic storm has passed.  End Summary. 
 
Macro: Consumption Holds Up; Investment Motor Stalls 
--------------------------------------------- ------- 
 
¶3. (U) Private consumption has held up since the September 
collapse of Lehman Brothers, supported by higher incomes and 
stable, low unemployment.  A rising real wage bill (up by 6.7 
percent in Q4, according to preliminary GoP estimates) and 
low unemployment (6.7 percent) supported strong Q4 private 
consumption growth (4.6 percent).  Nonetheless, local 
economists expect rising unemployment and restricted consumer 
credit will take their toll on consumption, pushing it under 
3 percent growth in 2009. 
 
¶4.  (U) Government consumption, after declining through the 
first half of 2008, picked up in the second half, boosting 
GDP by around one-half of a percentage point in Q4.  The 2009 
budget includes an increase of 1.5 percent.  That number is 
overly optimistic, however.  Lower than expected revenues, 
institutional difficulties in speeding up EU-financed 
projects, tight bond markets, and a strong GoP commitment to 
restrain deficit growth will keep the GoP from meeting its 
spending target.  Government spending will likely not drag or 
boost the economy significantly. 
 
¶5.  (SBU)  The real drag on Polish growth has been a collapse 
in investment, traditionally the sector most sensitive to 
weakness.  Investment in Poland grew by 16 and 24 percent in 
2006 and 2007, adding 3.1 and 4.3 percentage points to GDP 
growth.  In the final quarter of 2008, fixed investment 
stalled (up 3.5 percent), accounting for most of Poland's 
slower GDP growth.  All of our contacts are bleak on the 
prospects for recovery in investment next year and predict a 
decline. 
 
¶6.  (U)  Finally, both exports and imports are falling, only 
the second time since the collapse of the command economy 
that Polish exports have shrunk.  (The first, in 1999, 
followed the 1998 Ruble Crisis.)  Despite that, net exports 
were virtually unchanged at -2.3 percent in Q4.  Poland's 
economy is less trade dependent than others in this region, 
muting the impact of weakening export markets on the overall 
economy.  Exports' share of Polish GDP was 41 percent in 
2007, compared to 80 percent each in Hungary and the Czech 
Republic.  Additionally, the massive depreciation of the 
zloty since July (31 percent on the euro, 44 percent on the 
dollar) should stimulate marginally increased exports and 
lower imports in 2009. 
 
What Are the Unseen/Unrealized Risks? 
------------------------------------- 
 
WARSAW 00000253  002 OF 003 
 
 
 
¶7.  (SBU) As one American lawyer/investment advisor puts it, 
"I'd rather be in Poland than anywhere else right now." 
Nonetheless, he and others are thinking about the local risks 
that might undermine Poland's resistance to the global 
crisis. 
 
¶8.  (SBU) Our best/smartest contacts tell us that their 
biggest worry is pretty straightforward - any shock which 
contracts credit supply more than demand.  For example, 
restricted credit would further slow the one motor pulling 
the Polish economy forward - private consumption.  One 
specific scenario that concerns all of our contacts, to 
varying degrees, is that parent banks based in Rome, 
Frankfurt, or New York will begin to siphon capital from 
their healthy Polish subsidiaries.  Further, Polish companies 
tend to rely on short-term financing.  Should their banks 
find themselves short of capital, companies here could have 
difficulty rolling over their debt. 
 
¶9.  (SBU) Others worry that default in Ukraine or Russia 
could prove to be a contagion that investors, failing to 
differentiate between healthy and sick economies in the 
region, quickly spread through all of Central and Eastern 
Europe.  That contagion would further damage investment, 
contract credit, and drive the zloty even lower. 
 
¶10. (SBU) Significant, continuing depreciation of the zloty 
also carries risks, despite the marginal stimulus it should 
provide to net exports, by increasing the burden of foreign 
currency-denominated debt.  While that problem is real for 
those who hold the debt, Polish companies and households as a 
whole remain relatively unleveraged. 
 
¶11. (SBU) Zloty depreciation also exacerbates an emerging 
problem among Polish companies that, in the first half of the 
year, hedged against zloty appreciation.  Rather than buying 
straightforward call options, some of those companies bought 
more complicated contracts which exposed them to risks in the 
event of zloty depreciation.  The scope of this problem is 
not fully understood.  It is reported widely in the press and 
has drawn attention and legislative proposals from 
government.  The economists and bankers we talk to, however, 
are sanguine about the problem and estimate total exposure to 
be on the order of a manageable USD 4 billion.  Nonetheless, 
further zloty depreciation will exacerbate the problem. 
 
The GoP's Response 
------------------ 
 
¶12. (SBU) The government is responding to the external 
economic crisis with a mixture of more fiscal conservatism, 
creative debt management, labor market flexibility, and 
jawboning.  PM Tusk has sided with the anti-stimulus crowd in 
the EU, while Tusk and his Finance Minister have been almost 
militant in their rejection of deficit-financed stimulus. 
That stand has opened the government up to attack by the 
opposition Law and Justice (PiS) party, an opening PiS is 
exploiting.  Tusk and FinMin Rostowski learned at the hand of 
Balcerowicz that their conservative, fiscally prudent 
response is the right one.  Moreover, Poland's resistance to 
the economic crisis thus far is a validation, in part, of 
conservative fiscal policies since 2005. 
 
¶13. (SBU) Reinforcing their natural inclination is the worry 
- shared by bankers, economists, and civil servants in the 
Finance Ministry - that Poland has little or no room for 
deficit financing.  Contacts in the Finance Ministry report 
weaker demand for Polish debt, forcing them to issue 
shorter-duration bonds at higher spreads on U.S Treasuries. 
Further, the 2009 budget's revenue projections look less and 
less realistic.  The deficit through February was PLN 5.5 
billion, of a projected PLN 18.2 billion for all of 2009. 
Poland will have to borrow more just to keep up. 
 
¶14. (SBU) Instead, the government is seeking a mix of 
non-deficit remedies to stimulate the economy and mitigate 
the impact of weakness.  It has pledged to speed its use in 
Poland of billions in EU funds, though it is not clear it has 
 
WARSAW 00000253  003 OF 003 
 
 
the institutional capacity to do that.  It is using 
facilities available from International Financial 
Institutions, like the World Bank, to take advantage of lower 
interest rates, and it is working in the 
labor-business-government "Tripartite Council" to blunt the 
impact of declining demand on unemployment. 
 
¶15. (SBU) Finally, Poles believe their country is unfairly 
grouped with others as a "CEE economy" -- part of a region in 
crisis.  The GoP is working hard to differentiate Poland from 
its more troubled neighbors.  PM Tusk and FM Rostowski 
traveled to Davos in January with the message that "Poland is 
an island of stability".  Central Bank Chairman Skrzypek has 
just returned from Washington with the same message.  As the 
GoP works to maintain fiscal discipline, it may be working 
too to sharpen the distinction among CEE economies in the 
minds of outsiders to reduce the penalties it believes Poland 
is paying - depreciation, higher borrowing costs, investment 
flight - for being in the wrong neighborhood. 
 
¶16. (SBU) To reinforce all of these efforts, PM Tusk has 
doubled-down on his pre-Lehman commitment to bring Poland 
into the eurozone.  Aside from benefits euro adoption would 
bring in more certain economic times, adopting the euro today 
would the eliminate exchange rate uncertainty and zloty risk 
premia plaguing Poland as well as bolstering the government's 
effort to differentiate Poland from the weaker economies of 
the region.  However, the euro accession process has become 
much less certain thanks to the crisis.  Tusk's ability to 
achieve this goal remains in doubt, particularly if he lets 
the budget deficit exceed the EU's Maastricht criterion 
(three percent of GDP). 
 
Comment 
------- 
 
¶17. (SBU) Poland owes its resistance to global crisis, at 
least somewhat, to the dumb luck of fortunate timing. 
Consumer credit is a post-2001 innovation here and, by the 
summer of 2008, had not had enough time to develop into a 
bubble.  Similarly, the American and Western European banks 
that dominate the banking system continue to make record 
profits quarter after quarter by developing what remains a 
maturing market.  They have had no need to assume the risk of 
poorly understood, US-originated CDOs (for example) in a 
search for higher returns.  Finally, Poland's economic cycle 
was moving quickly towards a peak as Lehman collapsed, with 
record low unemployment and above-trend GDP growth driving up 
the wage bill and inflation.  At the outset, at least, global 
weakness has relieved upside pressure that had gathered in 
the economy. 
 
¶18.  (SBU) As Louis Pasteur noted, however, fortune favors 
the prepared.  The Civic Platform-led GoP can take some 
credit for Poland's resistance to crisis.  It imposed a 
budgetary discipline in good times that reduced the public 
debt to 46 percent of GDP.  Even before it took power, PO 
supplied the PiS government with its Finance Minister - Zyta 
Gilowska - who began fiscal consolidation following years of 
high deficits under the Democratic Left Alliance (SLD)-led 
government.  To the extent that Poland remains vulnerable to 
negative investor sentiment and tight bond markets, the GoP 
conservative fiscal response makes sense. 
ASHE