Transcript

Transcript of a Conference Call on the Flexible Credit Line Arrangement for Poland

January 21, 2011

MS. STANKOVA: Good afternoon. Welcome to the conference call on the Flexible Credit Line Arrangement for Poland that has been approved today by the Executive Board of the IMF. The conference call will be held by James Morsink, mission chief for Poland. The conference call and the press release, which is available now on the IMF online media briefing center, are under embargo until 2 p.m. Eastern Standard Time, which is 1800 GMT. With this brief introduction I will turn the microphone to James for his introductory remarks and then we will take your questions.

MR. MORSINK: Thank you, Olga. I’m James Morsink, the mission chief for Poland.

This morning, the IMF Executive Board approved a new two-year, US$30 billion flexible credit line arrangement for Poland. I’d like to make three points about this new development.

First, I think it points to the IMF’s crisis prevention toolkit, which was enhanced at the end of last year. The duration of FCL arrangements was increased from one year to up to two years and the implicit cap on access was removed. And so I think this shows how the global financial safety net was strengthened and how the IMF is in a position to help its member countries improve their insurance against risk events in the global economy.

Secondly, I think that, as I just said, the reason this has a higher access than the previous one is because of sizeable downside risks to Poland and, in particular, the possibility of further spillovers from financial turbulence in other parts of Europe. Poland has very deep and liquid financial markets compared to other countries in the region and its banking system is highly integrated into the European banking system. And so as a result, it’s exposed to rapid shifts in investor sentiment. So just to underline, an FCL is a precautionary arrangement, so these risks that I’m talking about are tail risks. They are not our central scenario, but I’m giving you this description just to underline the fact that these risks exist and that’s the reason for increasing the level of access.

And the third point I’d like to make is that the approval of the new FCL arrangement by the Executive Board underlines Poland’s strong economic policy frameworks. Now, these frameworks are what allowed the Polish authorities to undertaken countercyclical monetary and fiscal policies during the global downturn while preserving financial sector stability. So as a result, Poland was the only economy in the European Union to avoid a recession in 2009.

Now, also as a result of countercyclical fiscal policy, the fiscal deficit widened. And our best estimate right now is that the fiscal deficit was about 8 percent of GDP in 2010, but this was a consequence of a fiscal policy that helped to mitigate the depth of the downturn. And, in fact, it mitigated it so well that the economy actually grew in 2009.

Now that the economy is gathering momentum, it is time to start tightening macroeconomic policies gradually. And this is, indeed, what the authorities have done with the 2011 budget, which contains new consolidation measures of about 1 percent of GDP. And also, as you know, the other day the Central Bank raised the policy interest rate by 25 basis points, so things are moving in the direction of tighter monetary policies. The authorities are committed to keep implementing economic policies that preserve macroeconomic stability.

So with that, I’ll turn things back over to Olga.

MS. STANKOVA: Thank you, James. And now we’ll take your questions.

QUESTIONER: I wonder what kind of message the IMF thinks it is sending to the international capital markets. The Central Bank raised its rates, so it seems that things are going on well in Poland. Do you think that a country that has not tapped a single dollar in this credit line might need it in the near future and might need the amount to be raised so much?

MR. MORSINK: As I said, we do not see these risks that I described as a central scenario. These risks are tail risks, but the point of insurance is to be prepared for tail risks. We have in the report, but I can describe to you very briefly right now, the explanation of why we see the need for about US$30 billion in access, so why the credit line is in that amount.

Essentially, what we do is–from the baseline outlook for the balance of payments we apply shocks to the baseline. So, for example, for each of the main components of the balance of payments we apply shocks that are broadly in line with the experience of Poland and other European countries, other European emerging economies, during the 2008/2009 crisis.

So, again, just to reiterate, this is not our central scenario. This is a tail scenario. But yes, in a tail scenario it is plausible that Poland could draw on financing of up to US$30 billion.

QUESTIONER: But it reduces the amount the Fund can commit for the members. Is that the risk that was taken into account? I know it was something that was considered in the report on the flexible credit line to Mexico. What is your assessment on this? It’s US$10 billion less for other countries.

MR. MORSINK: It is correct that by approving the higher access credit line for Poland this reduces something called the Fund’s forward commitment capacity, the FCC. In terms of SDRs, which is our unit of account, the increase in Poland’s FCL is about 5-1/2 billion SDR, so the forward commitment capacity is reduced by that amount. However, even after taking into account the FCL for Poland as well as the FCL for Mexico and all other arrangements that have been approved to date, the Fund’s forward commitment capacity is about 110 billion SDR, which is relatively comfortable by historical standards.

QUESTIONER: I have a question about the pension system in Poland. As far as I know, up to now 7.3 percent of the wage went to private funds, and now the government wants that only 2.3 percent goes to private funds and the rest stays at the state, which will decrease deficit and debt numbers. Is that a policy the IMF supports?

MR. MORSINK: To answer your question, Poland is one of the few countries in the world that has a pre-funded second pillar system. And it also has undertaken very significant pension reforms in the late 1990s, which substantially improved the country’s long-term fiscal sustainability. So compared to other countries in the European Union, Poland has a very strong, long-term fiscal position.

Now, coming to this recent change in the pre-funding, what happened was that the level of pre-funding of the second pillar was reduced and with these payments being redirected towards the state pension system, the first pillar system, and these amounts will now be recorded in individual notional accounts. So with this change, essentially, you’re changing the profile of the pre-funding. You’re reducing the pre-funding, but you’re not changing the overall fiscal sustainability.

QUESTIONER: So you do not change the debts and deficits by this?

MR. MORSINK: Sorry, I should have agreed with you. Yes, you do change the current level of the deficit by about 1 percent of GDP. So because of this change, the fiscal deficit, the general government fiscal deficit, will improve by about 1 percent of GDP over the medium term. And in Poland, the gross government debt will also be lower because the deficit is lower.

Now, again, what is unchanged is Poland’s long-term fiscal position. So once you take into account future pension liabilities, those have gone up, right? So, although you improve your current fiscal indicators, you worsen your future fiscal indicators. And on balance, those two things balance out.

QUESTIONER: But sorry to press you on that. Does the IMF support such an accounting gimmick, I say?

MR. MORSINK: Well, I think the important thing here to focus on is what is happening with long-term sustainability, right? Poland has one of the strongest positions, or I believe the strongest position, in terms of long-term fiscal sustainability in the EU, and that has not been affected by this change. So I think that’s very positive.

Now, it is true that, unfortunately, the rules used by the European Union to determine fiscal performance, for example, you know, the 3-percent ceiling on the deficit or the 60-percent ceiling on government debt, but those rules do not take into account your long-term pension obligations, right? So these rules do not offer a level-playing field to countries. So, if you undertake wonderful pension reforms, you get no credit for that.

QUESTIONER: I was wondering if you have an outlook for growth for Poland over the next few years.

MR. MORSINK: Yes. Growth in 2010 accelerated and we see growth in 2010 at about 4 percent, and we expect that that will remain broadly stable over the next few years. In fact, with this fiscal consolidation in 2011, growth might moderate a little bit to like 3-3/4 percent, but pretty much we see it as solid growth, balanced growth at about 4 percent over the next few years.

MS. STANKOVA: Okay. Then we conclude the conference call. Thank you very much, James, and thank you for everybody participating. I would like to remind you that the embargo will be lifted at 2 p.m. Eastern Standard Time, 1800 GMT. The staff report will be published very shortly, perhaps early next week, and all the details will be available. Thank you.