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The Wall Street Journal
AUGUST 27, 2009
Poland Enjoys Relative Economic Health
Warsaw Learned From Crises; Grew 14 Straight Years
By MARYNIA KRUK
WARSAW -- Poland suffered several crises while the rest of the Continent was booming over the past few decades. But those crises are credited with helping it dodge the worst of the current crisis and making it likely one of just three European Union countries -- along with Slovakia and Greece -- to avoid recession this year.
Two Polish central bankers said last week that the country's economy may expand by about 1% in 2009, which would make this the 14th consecutive year of growth for the Central European country. Meanwhile, the euro zone has seen gross domestic product contract on an annual basis since the fourth quarter of 2008. Other post-communist economies, which grew faster than Poland during the good times, also have seen their economies shrink.
Poland benefited from some good luck this year: An income-tax cut came into effect just in time to stimulate the economy and infrastructure funds from the European Union also began to arrive just as the crisis started. The slow pace at which its politicians have moved to adopt the euro also allowed the zloty to weaken in early 2009, thereby helping its exporters.
But company executives and analysts say Poland also benefited from a conservative business and economic culture instilled over a period of hyperinflation during the fall of communism, from a restructuring of the state-owned banking system in the early 1990s and from a steep slowdown in growth in 2001-02.
"Some countries, like Argentina, go from crisis to crisis. Others learn from their mistakes," said Lars Christensen, senior analyst at Danske Bank in Copenhagen.
Worried about returning to a period of double-digit inflation that lasted from the demise of communism to the early parts of this decade, Poland's rate-setting council at the central bank, under former bank governor Leszek Balcerowicz, adopted a relatively tight monetary policy and kept it even after inflation eased in 2002.
At the time, Mr. Balcerowicz was criticized for stunting the country's growth while the rest of the region was booming. "Balcerowicz got it right, though for the wrong reasons," said Danske's Mr. Christensen. "He didn't say there were bubbles. He was concerned about loose fiscal policy."
The central bank's conservatism also prompted it to intervene verbally against lending to households and companies using foreign currencies, a common practice in Hungary and the Baltic countries because foreign currencies carried lower interest rates.
Poland's private-sector banks largely fell in line with the central bank's requests, sparing them the pain Hungary and the Baltic countries have felt as falling currencies took interest payments to unmanageable levels for many households.
The cheaper zloty has instead made Polish products more attractive to customers in the euro zone and prompted Poles to choose local goods over pricier imported ones.
Many policies planned in the boom years turned out to have welcome side effects after the credit crunch. The ruling Civic Platform party enacted a tax cut for wealthier Poles that kicked in at the beginning of 2009, just as the economy slowed, and enabled many Poles to keep spending. Also, the European Union has earmarked €67.28 billion ($96.3 billion) for Poland between 2007 and 2013, which acts as an additional stimulus.
But Rafal Antczak, a former bank economist who is now a vice president at Deloitte, said Poland wasn't just lucky.
"We're a society of skeptics, partly due to our historical experience of communism and propaganda," Mr. Antczak said. "We were skeptical about the boom, but we also didn't panic on news about the credit crunch."
Many of Poland's businesses invested cautiously after an unsustainable investment boom in the late 1990s. Wroclaw-based electric-parts wholesaler TIM SA for example, teetered on the brink of bankruptcy during the slowdown at the start of the decade. In 2001, TIM's sales fell 40% and the company fired 25% of its work force, eliminated all bonuses, and cut base pay for those left behind.
The company revamped its sales force's compensation structure, making commissions a much larger proportion of total pay, began insuring its accounts receivable and cut off nonpaying customers, even if it meant giving up market share. TIM returned to buoyancy thanks to the housing boom of the past several years. Sales began edging down again in 2008, and dropped almost a third year-to-year in the second quarter of this year.
Yet the company continues to generate positive cash flow by maintaining tight controls on inventory and lowering costs to match shrinking sales. Krzysztof Folta, TIM's founder and chief executive, said the brush with bankruptcy changed him.
Despite falling sales, TIM hasn't swung to a loss since last year, and has about 53 million zlotys ($18.5 million) on hand, almost enough to finance its operations for a full year, said Michal Sztabler, an analyst at PKO BP in Warsaw.
There are, of course, exceptions, such as state-controlled PKN Orlen, where chief executives generally don't stay around long enough to implement long-term strategy. In 2006, the Polish refiner loaded up on debt to make a huge international acquisition, Lithuanian Mazeikiu refinery, at the top of the market. Now it is forced to curtail capital expenditures and sell off noncore assets as it struggles to cope with the debt.
Write to Marynia Kruk at email@example.com
But what will happen after the Great Stock Market Crash of September 2009 - a time that will go down in the history books?
The true crisis is just about to unfold. If not this week, then next. Yes, it's that close.
Finance will dry up and exports evaporate as panic sets in. The Polish govt will be hit by a financing crisis as they are no longer able to fund their deficit on the open market - they are, as you are probably well aware, overly dependent on short-term paper.
And what's most irritating about it all is that the business newspapers will say "The long predicted fall in the stock markets should come as no surprise." Except it will of course to their readers, fed on the tripe they read.
The (UK) Daily Mail headline on Friday might well scream "Black Friday - billions wiped off shares".
The dollar will soar against the pound in a move that will have some pundits saying: "Dollar gains on news of US economic weakness" and others: "Pounds loses on news of UK economic weakness". Pundits - enough said.
Bad news hits hardest when everyone starts thinking that the worst is behind us.
I’m not sure things could get much worse in some parts of the US, although they probably will before economy picks up again.
I have no idea what will happen in Poland, but one good point made in the article above is that Polish businesses are conservative when it comes to borrowing and exotic financial products that became so common place in America and other places before the crash.
It's true that Polish businesses and banks were acting in a normal way when the world had already gone mad.
You have to remember though that the credit madness comes directly from the easy money policies followed by every US President and what passes for leadership in other 'major' countries since 1980. This crisis has been a long time in the brewing. That's why we're headed for a monumental Depression worldwide that's going to sweep everything before it. Back in the 30s, governments weren't bust either. And all this talk about inflation is nonsense - we're going to have deflation: all assets except cash are going to lose value in the next couple of years. Then inflation will come along to polish off whatever asset value you have left.
Shock and awe, and no-one is talking about it. Astonishing.
I think Poland is looking good, thanks to banking policies.
I think economic recovery has commenced, I suspect that high unemployment in both Poland and US will stay for a long time.
Interesting to see that prices of homes in Poland have come done.
Lets treat any dooms day predictions with a grain of salt
Stock markets in Europe and the US slumped today - it has begun.
For the historical record, on Sept 1st the stock markets stood at(roughly):
FTSE 100 - 4920
DJIA - 9550
Nikkei 225 - 10500 (topped at 10800)
Where are you getting your information concerning a soon to be huge depression? I don't hear any mention of this disaster in the German media.
There won't be any huge depression unless china disappears. As it stands that looks unlikely in the near future.
First things first - China is fast deflating. Watch their economy experience extreme pain. Don't be fooled by reports of economic growth - they substantially over-report economic activity. And watch the Shanghai exchange: down from 3500 to 2850 recently. Falls are done in shudders - there will be up weeks - but the end result is devastating all the same. Europe and the US will go down a lot until June 2010.
Now, my sources of information:
You can get a free subscription to get increased access to their materials, but much of it is premium unfortunately. I have followed their forecasts this year and everything has panned out perfectly. Reading the newspapers just leaves you confused. For example, did you know that the USD goes UP against the GBP when the stock markets go DOWN? Many moves depend on the fact that humans display distinctive herding patterns that are fairly predictable.
Alternatively, read http://yelnick.typepad.com/ for his reflections on Elliott Wave.
Yes, I do know there are many different opinions out there. If you want to read a good selection of them go to http://www.marketoracle.co.uk/
Remember: people thought that http://www.housepricecrash.co.uk/index.php was a crazy site for loons - until everything they wrote became true.
The fact is CREDIT has become a huge part of life in western democracies since 1980. This crisis wasn't caused by a few bankers behaving badly (though they did), it happened because democratically-elected politicians going back over almost 30 years have consistently stuck to ever-increasingly easy money policies. They acted like teenagers at a party - unable and unwilling to turn the music down until the police arrive. Even the sight of a police car fast approaching does no good, the policeman has to be at the door.
We now have to de-leverage a generation's indebtedness. The VALUE of the assets we hold has been pumped up by astonishing levels of debt maintained by a pyramid-style credit scheme. Humungous negative equity, but for the whole economy. This last happened in 1929, but not to the same extreme extent. (I'm talking here about the ratio of total indebtedness to GNP.) It was unwound by massive defaults on debts. The difference now is that, unlike in the 1930s, we have a worldwide problem and sovereign debt is under pressure too. Britain devalued sterling by 40% in 1930 (1931? - can't remember) - which is precisely what it has done in the last few months.
Debt defaults are being blocked by last-ditch attempts of politicians who simply do not understand what they are doing. Japan suffered from the same failed policy all through the 1990s - their "lost decade" - despite great export figures. They had extreme quantitive easing and it did them NO GOOD whatsoever.
By the way, remember how printing endless amounts of money is supposed to lead to inflation or hyperinflation? (Germany 1920s) Do we have that now? No. Why? Because the market has been trying desperatly to deflate. All this extra credit - now panic-stricken extra money - has simply gone into bubble after bubble over the last 10 years. It caused the dot.com boom, the housing boom, the stock market boom, the oil boom. But what comes after boom? Bust. The next little boom is perhaps going to be in gold - it might hit $1050 soon - or dollars ($1=1.10EUR?) I don't know. But seriously, very bad things lie ahead of us. A once in a lifetime bust. The NYSE regained its 1929 levels in ... 1954. And you want to hold shares with that risk level? Really?
"First things first - China is fast deflating. Watch their economy experience extreme pain. Don't be fooled by reports of economic growth - they substantially over-report economic activity. And watch the Shanghai exchange: down from 3500 to 2850 recently. Falls are done in shudders - there will be up weeks - but the end result is devastating all the same. Europe and the US will go down a lot until June 2010."
Yes because of their political situation and huge population but they have an infrastructure that can cushion against a lot of blows that other countries could not sustain. I think you will be surprised by how robust china is in the face of any economic pressure. As long as China does not change it's political and population make up, the status quo will create stability for the rest of the world.
I also think recovery will vary. For example the UK is hosting the olympics so that's already giving the economy a boost.
Hmmm - Obama's stimulus spending will not help one iota, and China's stimulus spending has been enormous too.
Government spending will simply crowd out private enterprise. This 30-year period of gorging on credit will not be cured by extra borrowing. You either take your pain now, or it will be worse and unavoidable tomorrow.
Oh - ever heard of Credit Default Swaps? No - well you should. They are a real source of worry for central bankers and governments.
It's impossible to predict long term because there are so many variables. At the moment things are picking up somewhat in the UK and from what Ive read in Poland. America seems to have been the worst hit, but everyone I know there has just adapted to the changes and worked in two or three jobs if necessary. The uk will be hardest hit in public services because it will take a few years to repay the huge debt. I reckon if they got rid of all the management consultants that would plug a sizeable gap all by itself.
Gordon Brown, ever the visionary, closed a whole load of JobCentres in 2006. Now in 2009 he has with great fanfare declared that he is investing in "new" JobCentres ...
The Inland Revenue sold off all its buildings - cheaply - to a property company in a tax haven and leased them back for 20 years, with guarantees of profit levels. Moronic or simply corruption?
The Commonwealth Development Corporation used to be about reducing Third World poverty, especially rural and water issues. It got sold off for peanuts, with the new owners (including the old advisors) making a fortune, and has turned its back on rural and water issues to invest in new shopping centres. Moronic or corruption? Certainly immoral Nu Labour at its best.
Consultants, civil servants and politicians keep on jumping from one branch to another after making the "correct" decision on a project, then profit from the situation in terms of cash. And yet Brits stare blankly at you when you say they live in a country rife with high level corruption. Surely not! They don't even comment on the energy sector being sold off to EDF, a company advised by Gordon Brown's brother.
Investors' focus on Warsaw
Plans to invest? Warsaw’s the option - claim foreign investors surveyed by Cushman & Wakefield. The well-known global research company has just published its latest „European Cities Monitor 2009” report.
The Polish capital city classified first among the cities which in the upcoming five years may count on the highest amounts of new investors. While last year there were 28 companies which considered investing in Warsaw, this year the number rose to 36. Warsaw came before Moscow, which was winning the ranking for the last two years, and among others, Bucharest and Prague.
- We are pleased with the results as they show improvement in Warsaw’s image as a possible investment destination for the biggest investment projects - said Warsaw’s Deputy President Jarosław Kochaniak.
Warsaw has also classified on high 3rd position in terms of business climate created by government (here the best were Dublin and Geneva) and in respect of the value for office space in relation to its standards (Birmingham and Leeds came respectively first and second in the category).
In the overall ranking i.e. covering all the criteria (standard of living, quality of telecommunication services, location, accessibility and workers’ reputation, office space renting costs, etc.) Warsaw ranked on 23rd position, coming before Copenhagen, Vienna, Moscow and Athens. In this year's ranking again the best was London.
The underlying data was researched independently by Cushman & Wakefield. 500 senior executives from leading European companies gave their views on Europe’s leading business cities. (Gazeta Wyborcza / um.warszawa.pl)