FORBES POLSKA CONFERENCE

Ladies and Gentlemen,

Many thanks for the invitation to address you today. It is an honour for the EBRD and for me personally to have the opportunity to reflect briefly on the historic events and changes in Poland and Eastern Europe over the past 20 years and the outlook in the face of the current crisis. And it is very special for us to do this in Poland, because your country has been in the vanguard of transition for some many years and in so many respects.

1. What has been achieved?

Poland is a country with a strong sense of its history and identity. For 146 years – the lifetime of more than five generations – your country did not exist as a unified, independent state. From 1772 to 1918 Poland was partitioned between Russia, Prussia and Austria. Yet, as a nation Poland survived.

It was this spirit of defiance that allowed the Polish nation to withstand and eventually see off an even greater threat, when Poland was again erased from the map by external powers during the second world war. After the war, the interlude of democracy was brief and soon ended with the communist takeover. Despite vigorously keeping up the three famous Polish “Rs” – resilience, religion and resistance – it was not before 12 September 1989 that the non-communist prime minister Tadeusz Mazowiecki and his cabinet were sworn in. Thus ended the history of the People’s Republic of Poland, and a fourth “R” could proudly be added to Poland’s national history: Rebirth.

In terms of economic developments, an economic reform programme was introduced and, unavoidably, things got worse before they got better. These reforms, or the shock therapy, had a profound impact on the Polish economy and the creation of a dynamic private business sector, much of it based on small and medium sized companies and the service sector.

Indeed, Poland was the first post-communist country to reach its pre-1989 GDP level in 1995. The rapid speed of transition also attracted criticism as parts of the population felt left out of the gains of the transformation. In recent years, with EU membership and rapid global growth, it appears that transition has become more accepted, with a greater number of people seeing the advantages and possibilities of entrepreneurship and private sector development.

I am mentioning this because it is worthwhile and necessary to put things into perspective when commemorating the historic events of 1989. Our perception of our lives is always shaped by current affairs and all too easily we ignore or forget what lies behind us. Today, in our world marked by the global financial and economic crisis, we have to ask ourselves the question: What has been achieved in the past 20 years?

Well: An incredible amount!

Today, Poland – together with its East European neighbours –is a member of the European Union. Your country today is secure, strong and respected and with a capacity to take ownership of your own future. Freedom of expression, human rights and rule of law are enshrined in the constitution. The system of parliamentary democracy and of checks and balances has been established. Poles are famous for their mistrust in their governments, but nowadays the rulers can be voted out of office in an orderly and civilised procedure.

Today, the borders which only 20 years ago seemed insurmountable, when the Iron Curtain was still dividing Europe for seemingly all times, are open. This is largely thanks to the endeavour of the people of Eastern Europe. The fall of communism has released the dynamism, vigour and strength of the region.

Today, Poland and the countries of Eastern Europe have dynamic market economies which were largely built from scratch in less than a generation and have private entrepreneurship as their foundation. There is always room for improvement, but this – as the crisis has amply demonstrated – is equally true for democracies and market economies of much longer standing.

The key objective for Poland will be in raising living standards, which are still well below those of Western Europe. This will require further efforts to expose economic sectors to the principles of market economy, while also increasing peoples incentives to work, start companies or educate themselves.

Let me now turned to the recent global crisis and its impact on Eastern Europe.

2. The crisis and impact on Eastern Europe

It may sound slightly paradoxical but to a certain degree the crisis and how it is playing out in Eastern Europe has also demonstrated the underlying strengths of the region, certainly when using Poland as an example. While it is true that at the moment no other region in the world is as severely affected by the global crisis, we can also detect signs that the countries will eventually emerge strengthened and competitive from today’s challenges.

Let me give you a few examples:

• The crisis did not start in the region although a slowdown was to some extent expected in order to adjust for emerging domestic and external imbalances; 
• Despite the severity of the crisis there have been no systemic banking crises and uncontrolled currency collapses (although there were episodes of intense pressures between October 2008 and March 2009), reform reversals, or challenges to democratic systems; and:
• Notwithstanding exposure to external shocks and a deep recession, the standard elements of past emerging market crises, such as massive capital flow reversals, have been largely absent.

Why is this so?

• First, because of the level and quality of trade, financial, and – in many cases – institutional integration with Europe and the global economy over the past 20 years. Bank financing and foreign direct investment in the EBRD region rest more on long-term commitments and less on “hot money” which has been the case in many emerging markets before.
• Second, the domestic and international policy responses have been consistent, fast and sometimes massive. Most countries have not resorted to confiscatory or fiscally unaffordable crisis measures, which were the staple of previous emerging market crises. Close political and institutional ties also proved to be instrumental in mobilising unprecedented international support: the IMF, the European Commission and International Financial Institutions such as the EBRD, the ECB, the EIB and the World Bank Group have all intervened early and decisively to tackle the crisis.
• Third, financial systems in Eastern Europe are generally smaller and sounder in terms of underlying credit quality and ability to absorb shocks than previous cases of emerging market crises.

3. Medium-term outlook

In our latest growth forecast, published in mid-October, our economists predict an overall decline of GDP of 6.3 per cent for the whole EBRD region in 2009 (stretching from Central Eastern Europe to the countries of the former Soviet Union, Turkey and South Eastern Europe). For the countries of Central and Eastern Europe, the fall is also severe, but much less dramatic with -3.4 per cent. For comparison: Ireland, according to its own central bank, this year will suffer a loss of 7.8 per cent GDP.

Poland, on the contrary, stands out not only in Central and Eastern Europe but also in the wider Europe with a predicted 1.3 per cent increase in 2009. I will revert to this later, but before that allow me a few words about the wider outlook.

Although we are currently seeing some stabilisation and for 2010 the EBRD now expects average growth of 2.5 per cent in our region, it would be a mistake to believe that the crisis is over. The higher growth in 2010 for example, masks the fact that we are now at a much lower starting point than previously expected. Instead, there is a risk that we may be entering a period of low and patchy growth, a state that may qualify as “prolonged recession”. In such a scenario, potential growth will be lower with investments and productivity subdued.

We therefore have to prepare ourselves for the next challenges. Among them we can identify the following:

• A continued rise in non-performing loans and possible corporate defaults;
• Effective private debt restructuring within the limits of financial affordability and without creating new distortions;
• Difficult fiscal reforms in several countries to manage the fiscal implications of the crisis;
• A long-standing vulnerability which has to be addressed are foreign exchange exposures of unhedged borrowers such as household mortgage loans denominated in euros, the US dollar or the Swiss franc;
• Linked to this is the challenge for Eastern Europe to develop local capital markets and increased savings. As external financing is likely to be much restricted in the coming years, it will no longer be possible to run large current account deficits and expand credit growth as before. In order to sustain investment and growth, other sources of financing will be needed.

Tackling these challenges will test the strength and commitment of governments. In many parts of the world, we have been living beyond our means and we will have to reduce debt levels in coming years. State intervention has been necessary in most countries to avoid a complete meltdown of the economy, but as large fiscal deficits develop, tough choices with regards to taxation and state expenditure are still ahead. The unavoidable end of stimulus programmes will have to be planned with outmost care in order not to destroy a fragile recovery.

It will require substantial skill to deal with rising unemployment, reductions of the welfare state and diminished future perspectives. After 20 years of enormous efforts, when by and large the only way for the countries of Eastern European was up, we now have to prepare ourselves for a period of adjustment and possibly slower growth. Still, beyond this period of adjustment, the conditions for growth in Eastern Europe – such as competitive wage levels and a skilled workforce – remain in place.

4. Why Poland is special – Is Poland special?

• The Polish economy has performed well in these testing times – much better than most European countries indeed. Factors which explain Poland’s recent favourable performance include: Smaller domestic and external imbalances going into the crisis;
• A relatively large domestic economy with less dependence on exports;
• A sound and less leveraged banking sector. The financial sector is also relatively small which implies a smaller impact on the real economy (domestic credit to the private sector was 55 per cent of GDP in 2008, the lowest rate in Central and Eastern Europe);
• A credible monetary policy with a flexible exchange rate which has helped in correcting for external imbalances;
• Increased inflow of EU structural funds (allocation for the period of 2007-2013 amounts to €67.3 billion);
• Active intervention and regulation by the central bank and supervisor to prevent excessive risk-taking, for instance by lending in foreign currency to unhedged households and companies;

The sound banking system in particular appears to have been a contributing factor to recent stability: the loan/deposit ratio is around 120 per cent and the share of foreign currency lending in relation to total lending is low in a regional context.

• The challenge, however, remains not to rest on one’s laurels but to create today the conditions for stronger growth tomorrow: A key task in an environment of weak growth will be fiscal sustainability. Already, the fiscal deficit has increased significantly and is set to be around 6 per cent of GDP this year. As a consequence, pressures on public debt are increasing fast (from 47 per cent of GDP in 2008).
• Another key challenge will be to preserve financial stability in a period of slowing economic activity and counteract the adverse effects on the real economy from financing constraints. Credit growth weakened very rapidly between October 2008 and February 2009 and financing conditions remain frail, in particular for small and medium sized companies.
• There remains a backlog of structural reforms in the labour market (in particular in raising the very low labour participation), business environment and privatisation. Poland will have important investment needs in the coming years, especially in energy and infrastructure, and it will be important to mobilise resources in an efficient manner. These reforms are crucial for increasing productivity and the growth potential.
• Finally: Euro membership will remain an important goal. Laying out a credible path to euro adoption will be important in order to guide expectations and implement necessary reform.

5. Conclusion

Two days ago we had your former President Aleksander Kwaśniewski as our guest at the EBRD. In a discussion he reminded us forcefully how fundamental the changes of the past years have been and that Poland has come a long way. This has not happened by accident or good fortune. What has been achieved since 1989 is the result of your hard and dogged work.

It is this spirit of determination, entrepreneurship, mobility and readiness to confront challenges that makes us confident that Poland – and the other countries of the EBRD region – will emerge from the present crisis strengthened. We should all be encouraged by the response to the crisis and we must not allow new challenges to obstruct our view on the key fundamentals of the region which remain strong.

As the region moves beyond the crisis, it will again be the private sector that will serve as the engine of growth. Supporting development through the private sector is the EBRD’s mission and we remain ready to engage in this process.

Thank you for your attention.

Last updated 14 April 2010