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The Warsaw Voice » Business » October 29, 2008
ECONOMY
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Slowdown, Not Recession
October 29, 2008 By Andrzej Ratajczyk   
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The crisis on global financial markets may slow Poland's economic development, but growth is expected to remain much faster than in most European Union countries.

Information from the Central Statistical Office (GUS) indicates that sold industrial production in September was 17.4 percent higher than in the previous month and 7 percent higher than in September 2007. This suggests that nothing bad is happening in the Polish economy. After GUS published its data, the Finance Ministry upheld its economic growth forecasts. "Based on September data, we expect that the growth rate in the third quarter will be some 5 percent," said Katarzyna Zajdel-Kurowska, deputy finance minister. "There are no grounds for modifying the GDP growth forecasts for this year. A possible correction of forecasts will depend on trends in the fourth quarter." GDP grew by 6.1 percent in the first quarter, 5.8 percent in Q2 and probably 4.8-5 percent in Q3, which suggests the ministry estimations of 5.4 percent for all of 2008 may turn out to be correct.

Next year, the economy's growth rate may indeed slow down. The government assumed in its 2009 budget that the GDP would increase 4.8 percent. However, this may be overly optimistic. Economists now believe that Poland will also feel the impact of the global financial crisis. Analysts from the U.S. bank J.P. Morgan have revised their forecast for Poland's GDP growth next year from 4.8 percent to 4 percent. The International Monetary Fund has come up with an even lower figure, 3.8 percent.

Nevertheless, international financial institutions believe that the Polish economy will keep developing, and much faster than Western economies. The forecasts for the euro-zone countries are 0.6 percent, and for the United States the prediction is 0.4 percent. Poland's higher forecasts indicate its economy stands a good chance of successfully facing down the global crisis and narrowing its gap with more developed countries.

A report from the Polish financial consultancy company Finamo suggests that in Poland, the impact of the global financial crisis is reduced by the fact that Polish GDP growth is fueled more by direct investment and domestic demand than by foreign trade. At the end of the second quarter, for example, exports amounted to a mere zl.252 billion, compared to domestic demand worth zl.622 billion. A relatively low dependency on the global economy combined with strong domestic demand is the best safeguard for an economy nowadays, many economists believe. The small share of Polish exports in GDP growth is a positive factor in current conditions, where Poland is still an attractive location for direct investment despite growing labor costs.

Finamo experts say that the financial sector is far more dependent on international factors than the rest of the Polish economy. The Warsaw Stock Exchange has been significantly affected by the turmoil on foreign trading floors because financial markets are linked globally. A bear market in New York often weakens the indexes in Europe, including Poland. That factor can make the stock exchange a less attractive place for companies to raise capital for development.

Investor nervousness will certainly result in fewer initial public offerings over the next several months, both from the private sector and the State Treasury, which handles the privatization of former state-owned companies.

The global crisis has primarily affected the Polish financial sector which, as a result, is struggling with lower liquidity. In general, the Polish banking system does not complain of a lack of money, with balanced amounts of loans and deposits. However, with lower trust among market players, especially the banks, the interbank lending market that usually ensures liquidity does not fulfill its role properly. The problem may be resolved with the increased participation of state institutions.

The current situation favors strong financial institutions with large pools of deposits. They stand a chance of increasing their market share by enticing more customers with attractive offers in an otherwise tight lending market, while at the same time inspiring confidence in depositors that their savings are safe. So the crisis may lead to a reshuffling on the banking market leader list in Poland, and may stimulate acquisitions and consolidation in the sector.

According to the National Bank of Poland, the Polish financial system is in good shape, but it is facing increased risks due to the crisis on global markets. NBP said in its October report on the financial system's stability that in the short term, the main source of risk is the lower liquidity of the domestic interbank market resulting from weakened trust between banks that, in turn, is related to the developments on the global financial market.

NBP experts say that in the middle term, the Polish financial system's stability may be threatened not by domestic weaknesses, but by slower development of the country's economy due to the weaker growth of Poland's main trade partners.
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