Poland—Assessment of the Impact of the Proposed Flexible Credit Line Arrangement on the Fund’s Finances and Liquidity Position

Poland’s macroeconomic performance was strong in the decade leading up to the global crisis. Poland’s commitments to the EU Stability and Growth Pact helped lower the fiscal deficit and limit government debt. Its strong financial supervisory framework helped foster a well-capitalized banking system. A successor Flexible Credit Line arrangement for Poland will play an important role in supporting the government’s economic policy strategy. Although Poland’s underlying fundamentals remain strong, there are risks to the near-term outlook, considering its large and open capital markets.

Abstract

Poland’s macroeconomic performance was strong in the decade leading up to the global crisis. Poland’s commitments to the EU Stability and Growth Pact helped lower the fiscal deficit and limit government debt. Its strong financial supervisory framework helped foster a well-capitalized banking system. A successor Flexible Credit Line arrangement for Poland will play an important role in supporting the government’s economic policy strategy. Although Poland’s underlying fundamentals remain strong, there are risks to the near-term outlook, considering its large and open capital markets.

1. This note assesses the impact of the proposed Flexible Credit Line (FCL) arrangement for Poland on the Fund’s finances and liquidity position, in accordance with the policy on the FCL.1 The proposed arrangement would cover a 12-month period, be in an amount of SDR 13.69 billion (1,000 percent of quota), and succeed the FCL arrangement of an identical amount that expired on May 5, 2010. The full amount of access proposed would be available throughout the arrangement period, in one or multiple purchases.2 The authorities intend to treat the arrangement as precautionary.

I. Background

2. Against the backdrop of a global economic and financial crisis, a one-year precautionary FCL arrangement equivalent to SDR 13.69 billion was approved on May 6, 2009. The authorities’ effective policy responses to the global crisis have been successful in maintaining stability, and no drawings were made under the previous FCL arrangement. Poland has a history of strong performance under Fund arrangements and an exemplary record of meeting its obligations to the Fund.3

3. Total external and public debt levels are significant but sustainable. External debt, which was in the range of 44–55 percent of GDP in the years preceding the recent crisis, increased to about 65 percent of GDP in 2009 owing to the effects of depreciation of the zloty. However, with the recovery in growth, external debt is projected to decline slightly to around 63 percent of GDP over the medium term. Short-term debt on a residual maturity basis is projected at about a third of total external debt in 2010 and to decline to about a quarter over the medium term. Public external debt, which increased to about 21½ percent of GDP in 2009, is estimated to reach about 23 percent of GDP by end-2010. Gross public debt (on an ESA95 basis), which had stabilized at just under 50 percent of GDP before the crisis, is projected to increase to around 55 percent of GDP by end-2010, and to stabilize around 60 percent of GDP in the coming years. Sustainability analyses show both external and public debt remaining manageable under a range of scenarios, with no significant contingent liabilities incurred during the crisis.4

4. The substantial access under the proposed arrangement could add significantly to the Fund’s credit exposure. If the full amount available under the FCL arrangement—which the authorities intend to treat as precautionary—were drawn, Poland’s outstanding use of GRA resources would reach SDR 13.69 billion, among the highest of individual country exposures.5

5. If the full amount available under the proposed FCL arrangement is purchased in 2010:

  • Fund credit would represent a modest part of Poland’s external debt. Total external debt would rise to over 73 percent of GDP initially, and public external debt would rise to about 27½ percent of GDP, with Fund credit being some 4½ percent of GDP (Table 1). At its peak, Poland’s outstanding use of GRA resources would account for about 6½ percent of total external debt, almost 17 percent of public external debt, and about 18½ percent of gross international reserves.

  • External debt service would increase over the medium-term, but this would likely be manageable assuming a continued recovery in global financial markets Poland’s projected debt service to the Fund would peak in 2014 at just over SDR 7 billion, or about 2 percent of GDP.6 In terms of exports of goods and services, external debt service to the Fund would peak at about to 4½ percent, and would then account for slightly over 40 percent of total public external debt service.

Table 1.

Poland: Capacity to Repay Indicators 1/

article image
Sources: Polish authorities, Finance Department, World Economic Outlook, and IMF staff estimates.

Assumes full drawings under the FCL upon approval. The Polish authorities have expressed their intention to treat the arrangement as precautionary, as balance of payments pressures have not materialized.

Based on the rate of charge as of June 10, 2010. Includes surcharges under the system currently in force and service charges.

Staff projections for external debt, GDP, gross international reserves, and exports of goods and services, as used in the staff report that requests the proposed FCL, adjusted for the impact of the assumed FCL drawing.

6. Reflecting the high access under the arrangement, the impact on the Fund’s liquidity, and on its potential exposure to credit risk, would be substantial:

  • The proposed arrangement would significantly reduce the Fund’s forward commitment capacity (FCC) from its current record level.7 Approval of the proposed arrangement would reduce the FCC by SDR 13.69 billion, an 8½ percent reduction in the FCC.

  • If the resources available under the FCL arrangement were fully drawn, GRA credit to Poland as a share of total GRA credit would be about 22½ percent. As a result, the concentration of Fund credit among the top five users of Fund resources would decline slightly to 69 percent from 70 percent, currently.

  • Potential GRA exposure to Poland would be almost twice the Fund’s current precautionary balances.

Table 2.

FCL Arrangement for Poland—Impact on GRA Finances

(In SDR millions, unless otherwise indicated)

article image
Sources: Finance Department.

The FCC measures the Fund’s capacity to make new credit commitments over the next 12 months. It includes the liquidity effects of resources made available under borrowing and note purchase agreements.

Based on current Fund credit outstanding plus full drawings under the proposed FCL.

Precautionary balances exclude amounts in Special Reserves attributable to profits on gold sales in FY2010.

II. Assessment

7. The proposed arrangement would have a large but manageable impact on the Fund’s liquidity. While sufficiently strong to accommodate the liquidity impact of the proposed arrangement, the Fund’s liquidity position could deteriorate quickly, particularly if there is further demand for large arrangements. This underscores the need for continued close monitoring of liquidity, to continue the efforts to bring new bilateral borrowing agreements on line to supplement the Fund’s resources, and to conclude the ratification of the expanded New Arrangements to Borrow in a timely manner.

8. Poland intends to treat the FCL arrangement as precautionary, but if it did prove necessary to draw, this would feature prominently among the Fund’s single credit exposures. Poland’s overall external debt and debt service ratios are expected to remain manageable including should adverse shocks materialize such that a purchase became necessary. Poland’s sustained track record of implementing strong policies, including during the global financial crisis, and sound institutional policy framework provide assurances about the future course of policies such that Poland’s capacity to repay is expected to remain strong. Nonetheless, the scale of the Fund’s potential exposure to Poland—in conjunction with the recent increase in commitments to other members and the possibility of further credit expansion under already existing or new Fund arrangements—underscores the need to strengthen the Fund’s precautionary balances.

1

See GRA Lending Toolkit and Conditionality—Reform Proposals (SM/09/69, 3/13/09), GRA Lending Toolkit and Conditionality—Reform Proposals (SM/09/69, Sup. 2, 3/24/09), and Flexible Credit Line (FCL) Arrangements, Decision No.14283-(09/29), adopted March 24, 2009.

2

If the full amount is not drawn in the first six months of the arrangement, subsequent purchases are subject to a review of Poland’s continued qualification for the FCL arrangement.

3

See Republic of Poland—Assessment of the Impact of the Proposed Flexible Credit Line Arrangement on the Fund’s Finances and Liquidity Position (EBS/09/57, Sup. 1, 04/28/2009).

4

A more detailed description of external and public debt is provided in the staff report.

5

The largest GRA credit exposure has been SDR 23.359 billion to Brazil in 2003.

6

The figures on debt service used in this report are calculated assuming that full amount available under the arrangement is purchased upon approval of the arrangement, and that all repurchases are made as scheduled.

7

The FCC has been greatly bolstered by the supplementary resources available under the bilateral borrowing and note purchase agreements.

Republic of Poland: Arrangement Under the Flexible Credit Line: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director the Republic of Poland
Author: International Monetary Fund