National Law University Jodhpur

COURSE: FMRSSemester: 2nd LL.M.; Stream: Banking & Finance

Project Title: Critical analysis of Economy of Poland during Financial Crisis

Submitted To:Dr. Rituparna DasSubmitted by-Ujjwal Kumar

TABLE OF CONTENT

Serial NumberChapterPage Number

1.Introduction3

2CHAPTER 1POLISH RESPONSE TO FINANCIAL CRISIS8

1.1 INFLATION

10

1.2 FISCAL POLICY and DEFICIT SPENDING11

3Chapter 2Polands exceptional performance during the world economic crisis: New growth accounting evidence12

4Chapter 3Foreign trade of Poland during the global financial crisis16

3.1 The situation on the current account of the balance of payments in the first years after Polands accession to the European Union17

3.2 The foreign trade in 2008 the year of the outbreak of the global financial crisis19

3.3 Recent developments in Polands foreign trade21

5Chapter 4The Polish banking system during the crisis22

6Conclusion24

7Bibliography26

INTRODUCTIONThe global economic crisis has had a profound effect on the public finances of many countries, especially those in Europe. Unlike the majority of European countries, Poland has actually faired very well in the face of this recession. Yet, despite optimistic remarks by the ruling politicians, Poland is not immune to the effects of the crisis, and that includes its public finances. Like all other EU countries in the last two years, Polands public debt has increased to dangerous levels and the budget deficit remains high. This article provides some reflections through a closer look at Poland and its response to the global financial crisis, with a special emphasis on the situation concerning public sector finances. The author discusses the situation in Poland leading up to the crisis and examines the situation faced by the Polish government after the onset of the crisis. This article outlines various measures that were taken or are currently being taken to stem any further effects of the crisis, such as raising the national value-added tax, the consolidation of public finances at the sub-national levels, and efforts to reform the pension system. It concludes with remarks regarding the implications of these measures and what the future may hold for Polands public finances.ThePolish economy is the sixth-largest in the EU,and the largest among the ex-communist members of the European Union.Before thelate-2000s recessionits economy grew a yearly growth rate of over 6.0%. According to the Central Statistical Office of Poland, in 2010 the Polish economic growth rate was 3.9%, which was one of the best results in Europe. In Q1 2014 its economy grew by 3.4% and is expected to grow by 3.4% in 2014, 3.7% in 2015 and 3.9% in 2016.Since theglobal recession of 2009, Poland's GDP continued to grow. In 2009, at the high point of the crisis, the GDP for the European Union as a whole dropped by 4.5% while Polish GDP increased by 1.6%. As of November 2013, the size of EU's economy remains below the pre-crisis level, while Poland's economy increased by a cumulative 16%.The major reasons for its success appear to be a large internal market (in terms of population is sixth in EU) and a business friendly political climate. The economic reforms implemented after the fall of communism in the 1990s have also played a role; between 1989 and 2007 Poland's economy grew by 177%, faster than other countries in Eastern and Central Europe, while at the same time millions were left without work. Another factor which allowed the Polish economy to avoid the financial crisis was its low level of public debt, at about 50% of GDP, below the EU average (around 90%). Strict financial regulation also helped to keep household and corporate debt low. Furthermore, unlike many other European countries, Poland did not implementausteritybut rather boosted domestic demand throughKeynesian policyof tax cut, and foreign-assistance funded public spending. An additional reason for its success lay in the fact that Poland is outside theEuro zone. The depreciation of the currency, thezoty, increased international competitiveness and boosted the value of Poland's exports.However, the economic fluctuations of thebusiness cycledid have an impact on Poland'sunemployment rate, which by early 2013 reached almost 11%. This level was still below European average and has begun falling subsequently. A of February 2014, Poland's unemployment rate stood at 14% according to Polish Central Statistics Office and 9.7% according to Eurostat which stated European average is 10.6% (and 11.9% for the EU18). Unemployment remains a permanent and one of the most important problems of Poland and has been growing since years and Polish unemployment remains one of the highest in EU Warsaw Business Journal remarked that the fact that despite the growing GDP Polish unemployment remained "stubbornly high" casts shadow over claims of economic success; in 2012 the unemployment rate in Poland was 13.3 percent, higher than it was in 1991 (12.2 )after capitalist reforms were initiated Entrenched structural unemployment is especially problematic in Poland, with 46% of the jobless being long term unemployed Lack of employment opportunities, low wages and poverty have led to flight of over 2 million Poles to Western EU in search of better life since 2004; with most being in the young demographic and not intending to return to Poland, this is expected to cause long term problems in Polish economy according to professor Gavin Rae from Kozminski University most of Polish recent economic growth was based on ability to leverage funding from EU[footnoteRef:2]. [2: "EUROPP After years of above-average growth, Poland now faces the spectre of recession". Blogs.lse.ac.uk. 2013-07-09. Retrieved2015-03-01.]

As the European Union fell into the global recession that began in 2008, only one nation in the region kept growing while its neighbors saw their economies fall. That title belongs to Poland, which made it through the period without experiencing a single year of falling gross domestic product. Growth slowed down, but even at the lowest point, Polands economy continued to expand slightly, and Polish officials remain bearish.Poland is the only country that was not negatively impacted by the recession. We have been calculating that from 2008 until now, we have almost 16 percent growth, Under-Secretary of State Beata Stelmach said in Warsaw last week. Its very difficult to predict economic growth for the next five years. However, at our worst, in 2009, our growth was still 1.6 percent. We were green and everybody else was red.According to the CIA World Factbook, Poland experienced 4.8 percent, 1.7 percent, 3.8 percent and 4.4 percent growth in 2008, 2009, 2010 and 2011, respectively.The same source shows thatthe EU as a whole experienced 0.8 percent, negative 4 percent, 1.8 percent and 1.6 percent growth in the same years.Polands enduring economic health is beyond dispute, as Ernst & Young noted inits 2012 European Attractiveness Survey, claiming that although many countries remain in economic difficulty, Poland, by contrast, is enjoying dynamic growth."Its future is not as certain, as an external assessment of Poland's economic situation compiled by the Australian Department of Foreign Affairs and Trade points out: "The OECD predicts growth will slow to around 3 per cent over the next two years, due to a combination of weaker external demand, Euro zone uncertainty, ongoing fiscal consolidation, the deceleration of public investment following the 2012 soccer championships, and the leveling off of EU funds in 2013." The department did add, however, that "Poland is one of the few emerging economies to still enjoy stable credit ratings."Looking back over the past several years, its not yet clear exactly what enabled Poland to be an exception in a world brought to its knees by financial crisis.Polish business leaders and officials including Stelmach offer a range of explanations, which they believe combined to create an environment conducive to growth in a number of sectors of Polands maturing market economy.Rafal Szajewski, team lead for the services section at Poland's Foreign Investment Department, described three key factors that he believes helped the nation weather the economic storm.The first is the huge amount of European Union funds that have been spent on improving infrastructure and completing other projects in Poland since the nation joined the EU in May 2004.All the benefits and funds we got when we joined the EU have helped a lot to improve the business environment and drive change, Szajewski said at an outsourcing discussion held last week in Warsaw.Stelmach also cited the infusion of E.U. funds as one of the big drivers of Polands recent prosperity and economic flowering. Look at other countries, some of them dont have ideas about what to do with the money," she said. "So infrastructure is another sector that has boosted our economic growth.some outside experts do not see quite as positive a future for Poland. Tatha Ghose, senior emerging markets economist at Commerzbank in London, cites extensive research in analyzing the nation's economic health moving forward:"Poland itself now has a burst construction bubble after a hectic level of building leading up to the Euro 2012 soccer tournament; construction bankruptcies have reached a peak, and this sector is going into recession," Ghose said via e-mail. "Hence, Poland's capacity to absorb extra workers is low at this time and will probably worsen, resulting in rising unemployment. This is why we expect Polish growth to under perform over the coming year (we forecast c. 2% growth next year, even in a much better environment than post-Lehman 2009, when Polish GDP had increased by 1.7%)."One solution would be to look more extensively abroad to find new opportunities for growth. Some Polish companies are already beginning to do so, as evidenced by one mega-deal that took place in December, when Polish mining giant KGHM Polska Miedz S.A. (Warsaw: KGH), Europe's biggest copper miner, completed its $3 billion acquisition of Canada's Quadra FNX.Today if you look at our numbers, 80 percent of Polands foreign trade is done with other European countries. So today is the time for bigger expansion, and some of the companies are doing big expansion in further away countries, said Stelmach. If you look at where our economic growth comes from, a large portion of that growth is from exports, so if our [European] partners economies slow down, then we will need to turn to new markets.

CHAPTER 1POLISH RESPONSE TO FINANCIAL CRISISThe fact that Poland experienced such a high investment and growth immediately prior to the crisis may help explain some of the reason why Polands economy weathered most of the storm felt across the rest of Europe starting at the end of 2008. The growth that Poland experienced prior to 2008, however, was significantly stalled once the banking crisis hit in the United States and later followed in Europe. By midto late-2008, the significant deterioration in the global economy impacted Polish growth and witnessed a reduction of most measures of business activity in Poland with a significant decrease in production power. At the same time, as the Euro zone recession began, together with increasing uncertainty about prospects for the Polish economy, investment activity of Polish enterprises diminished considerably. (National Bank of Poland, 2010, p. 19). Despite an economy that stayed above the red, Poland, like all other nations, prepared to deal with the crisis, considerably worried about the direct effect on public financing. In immediate response to the crisis, Poland released the Stability and Development Plan - Strengthening the Polish economy in the time of the world financial crisis[footnoteRef:3]. [3: Bartyzel, Dorota (October 26, 2010). Poland May Keep Rates at Record Low as Belka Outweighs Inflation Concern. http://www.bloomberg.com/news/2010-10-26/poland-may-keep-rates-at-recordlow-as-belka-outweighs-inflation-concern.html 29 Jan 2015.]

On November 30, 2008. The plan called for action and legislation amounting to 91.3 billion zloty in activities to stimulate investment in the Polish economy as well as support consumer conditions. Primary activities that were outlined in the plan included: Maintaining the stability of public finances; Maintaining the stability of the financial system implementing a Trust Package by the National Bank of Poland to increase the liquidity of the banking system. The plan also called on Polish public finances to reduce the cost of debt servicing, which especially was critical considering the scope of the crisis and the credit situation. The plan noted that any decision to increase the budget deficit may lead to the abrupt decline in valuation of its debt, which would be counterproductive. The plan also delineated a reduction in general budget spending by 1.7 billion zloty to allow flexibility in the movement of resources[footnoteRef:4]. In addition, the National Bank of Poland complemented the Stability and Development Plan with anti-crisis measures such as:- [4: Bojanowski, M. (Jan 2011). Emerytalny wycig z czasem. Zmiany wejd w ycie od kwietnia? Gazeta Wyborcza. 31 Jan 2015.]

1) Mitigating economic downturn for workers and entrepreneurs, 2) Providing assistance in the repayment of housing loans to people who lost their jobs, 3) Support medium and large enterprises, implementing projects important for the Polish economy (with the use of loans and guarantees from the Industry Restructuring Agency). The recession in the Euro area economies affected Poland mostly in regard to the decrease in demand for Polish products. Considering that our European neighbours are Polands largest trading partners there was a natural decline in Polish exports. The primary threat to Polands economic growth was the development of the situation in the worlds largest economies, such as the United States, France, Germany, and the United Kingdom. A considerable portion of Polands economic health depends on the efficiency of those countries stimulus, internal domestic policies, and the speed of recovery abroad. This key fact demonstrates Polands place in the global economy[footnoteRef:5]. [5: http://wyborcza.biz/biznes/1,100896,8906205,Emerytalny_wyscig_z_czasem__Zmiany_wejda_w_zycie_ od.html. Accessed 30 Jan 2015.]

Considering the prospects for slow economic recovery, Poland, like so many other nations, has significant ongoing challenges in its public sector. Some of these challenges exist despite the crisis; others are confounded by it. Nevertheless, it is viable to note that Polands public sector activity in the past few years has two sides one is the ongoing reforms necessary to continue to advance Poland from being an emerging economy despite the recession; and on the other side are the measures that have taken place in the public sector to prevent further damage by the economic downturn[footnoteRef:6]. [6: Cielak, R. and Wojciechowski, Z. (Dec 2010). Zblia si termin likwidacji gospodarstw pomocniczych i czci zakadw budetowych. Gazeta Samorzdu i Administracji.]

In the context of the ongoing global financial crisis, Polands response in the public sector revolves around five central themes: Inflation (including an analysis of raising the Value Added Tax by 1% in 2011); Fiscal policy and deficit spending; Public employment and pension reform; Reliance on EU funding to supplement budget cuts; Fiscal consolidation and public finance at the local level; The delicate balance between economic stimulus and austerity will prove difficult in the coming year or two. Lowering the scale of financial imbalances in the medium term is needed in order to curb the rise in public debt and the obligations imposed on Poland under its deficit. The state of Polands public sector finances will largely depend upon how Poland addresses these challenges in the coming years[footnoteRef:7]. [7: European Central Bank (2010). Annual report 2009. Eurpean Central Bank. Pp 23-88; 118-120. http:// www.ecb.int/pub/pdf/annrep/ar2009en.pdf Accessed Jan 24, 2015.]

1.1 INFLATIONLike all emerging economies, inflation continues to be a concern for Poland. Fortunately, the consumer price index (as a measure for inflation) has steadily decreased in the last few years from an annual rate of 4.2% increase in the consumer price index in 2008 to 2.58% increase in 2010 (Tradingeconomics.com; forsa.pl), which compares to the EU average of 3.3%, 1.4%, and 2.2%, respectively[footnoteRef:8]. These rates, while hopeful for an emerging economy, especially in an economic downturn, are still high enough to cause concern. In response to the mixed news of the CPI, the monetary policy of Poland has been to keep interest rates down. In relation to inflation, the International Monetary Fund reported in October 2010 that considerable uncertainty surrounds the outlook for inflation, especially with regard to labour supply and the impact of capital inflows on the exchange rate. Yet, on top of this concern is an increase in Polands national Value Added Tax (VAT) rate, which went into effect 1 January 2011. The law rose taxes by one percentage point to 23% on most consumer goods, including food, electrical appliances, and cosmetics. The tax increase is meant to be only temporary, for a period of three years ending December 31, 2013. According to research by the Economic Institute of the National Bank of Poland, the short-term effects of the VAT increase on inflation should not be significant, and should not exceed 0.3 percent; while the longer-term influence on the Consumer Price Index should be neutral. Raising taxes in the middle of an economic downturn sounds counterproductive. An increase of taxes on consumer goods will obviously inhibit consumer demand, impact inflation, and force Polish consumers to tighten their spending on goods and services and thus could have a negative effect on the economy. On the other hand, raising the VAT by 1% for a defined period of time may aid the public sector finances, at least provide some assistance to keep public funding commitments, rather than cut programs indiscriminately, and provides an alternative to brutal austerity programs. The increase in taxes and the budget revenue that it will provide may also aid in Polands efforts to minimize deficit spending and control public debt. Projections aside, there is risk on behalf of the Polish government by the modest tax increase. Its impact and additional burden to the CPI versus its slight benefit to the public sector finances (by adding an estimated 5 bln zloty[footnoteRef:9] a year) remains to be seen[footnoteRef:10]. [8: Eurostat (December 2009). Euro area annual inflation up to 0.9% ; EU up to 1.4%. http://epp.eurostat. ec.europa.eu/cache/ITY_PUBLIC/2-15012010-AP/EN/2-15012010-AP-EN.PDF Accessed 24 Jan 2015.] [9: Currency of Poland.] [10: Eurostat (2010). GDP per inhabitant in the Member States varied between 41% and 268% of the EU27 average. Eurostat Press Office]

1.2 FISCAL POLICY and DEFICIT SPENDINGThe global economic downturn has led to a decline in general government revenues. Polands fiscal situation continues to be a concern, with the global economic crisis only exacerbating this concern. Given the high share of fixed expenditures in the budget and increased debt servicing costs, the public sector deficit will be further magnified - which increases the level of public debt in relation to GDP. Despite high economic growth, as mentioned above, in the period prior to the economic crisis, public spending grew much faster than GDP. According to the European Central Bank, between 2006 and 2009 Poland maintained deficit spending above 3% of its GDP.The current economic slowdown has exposed some structural weaknesses in public finances. During recovery, the economic burden has been reduced by the government, which consequently increased the structural deficit in public sector finances. The significant weakening of GDP growth (while still growing) in 2009 contributed to a slump in tax revenues. Loss of revenue in conjunction with the rigid structure of public expenditures consequently led to a strong increase in public sector deficits. Already in 2008 there was a significant increase in the public deficit to a level of 3.6% of GDP.The increase in the Polish VAT by 1% is expected to alleviate some of the deficit burden by adding an estimated 5 billion zloty a year for the next three years to the public treasury (Sionko, 04 Aug 2010). Whats more, the International Monetary Fund (IMF) in October 2010, upon reviewing Polands financial credibility especially in light of the VAT increased, announced that it expected to see the deficit-to-GDP ratio to fall below five percent of the GDP in 2013 indeed some welcomed news for the public sector[footnoteRef:11]. [11: Gazeta Prawna (Jan 9 2011). Gra: rzd doprowadzi do redukcji zatrudnienia w administracji. 29 Jan 2015. http://praca.gazetaprawna.pl/artykuly/476732,gras_rzad_doprowadzi_do_redukcji_ zatrudnienia_w_administracji.html]

Chapter 2Polands exceptional performance during the world economic crisis: New growth accounting evidenceUsing a growth accounting exercise based on new estimates of flows of capital and labor services in the Polish economy during the period 1995-2013, we study the consequences of the recent global economic crisis for the observed pace and structure of economic growth in Poland a converging open economy which itself did not contribute to the breakout of the crisis. We thus provide a supply-side explanation why Poland fared so well during the world economic crisis. According to our results, the exceptional performance of the Polish economy in 2008-10 was an effect of several favorable circumstances. In particular, and unlike other European countries, it recorded both a marked increase in capital deepening and an improvement in workforce composition. We also find that the recent recession has not exerted any significant impact on the efficiency with which economic resources are used for production in Poland[footnoteRef:12]. [12: Gazeta Wyborcza. (Jan 10 2011). Miao by mniej urzdnikw, a jest ich wicej o 30 tys. 10 Jan 2011. http://wiadomosci.gazeta.pl/Wiadomosci/1,80273,8923987,Mialo_byc_mniej_urzednikow__a_jest_ ich_wiecej_o_30.html. Accessed online 31 Jan 2015.]

The world economic crisis, which broke out in 2007-08, turned out to be deeper and last longer than any other post-war recession. It originated in the financial system of the US economy and immediately affected the level of economic activity worldwide. However, after the initial common response, the economic routes of many countries diverged[footnoteRef:13]. Some of them grew relatively quickly out of the recession, whereas in some others (notably several European countries) the underlying structural weaknesses were revealed, increasing the length and depth of the recession. Poland was among the countries that suffered least from the world economic crisis, and it was even often mentioned as an exception among its European peers in particular, the only one which recorded positive GDP growth in 2009. The objective of this paper is to provide a supply-side explanation for Polands exceptional performance during the world economic crisis. Its consequences for the pace and structure of economic growth in Poland are studied with the help of a standard growth accounting framework but using a new, arguably more precise calculation of flows of capital and labor services. Based on these new estimates, we also construct an empirical measure of output adjusted for capacity utilization (henceforth, CU-adjusted output)[footnoteRef:14]. [13: International Monetary Fund (2010). PolandConcluding Statement of the 2010 Staff Visit. Warsaw, January 29, 2015.] [14: Jones, Gareth. Polish debt wont top 55 pct of GDP in 2011 Forex Yard. http://www.forexyard.com/en/news/Polish-debt-wont-top-55-pct-of-GDP-in-2011-FinMin-2010-12- 17T180455Z-UPDATE-1. Accessed 27 Feb 2015.]

To understand the cross-country differences in the impact of the crisis, it is important to fi rst look at the cyclical positions of the CEE[footnoteRef:15] countries and the closely related macroeconomic imbalances existing when the financial crisis intensified in September 2008. In fact, the CEE countries were in very different cyclical positions when the financial crisis began. In the years preceding the crisis, a number of them, in particular the Baltic countries grew rapidly, often at unsustainable rates, which led to a widening of the positive output gap and fostered the emergence of internal and external imbalances. Owing to strong capital inflows and credit growth the latter fuelled by very low and in some cases even negative real interest rates several CEE countries experienced strong rises in asset prices, in particular house prices. Wealth effects, in turn, further stoked excess demand pressures. In a number of countries, especially Bulgaria, the Baltic States and Romania, substantial wage increases, in some cases accompanied by rapid public wage growth, led to strong increases in unit labour costs. Expansionary fiscal policies also boosted GDP growth ahead of the crisis and led to significant structural budget deficits in 2007 in several countries, in particular the Czech Republic, Hungary, Latvia, Lithuania, Poland and Romania. [15: Centrtal and Eastern Europe.]

The final dominant theme relating to Poland, its public finances, and the financial crisis is a recent law in Poland on fiscal consolidation at the local level. The law on public finances, passed August 27 2009, introduced significant changes in both the systematic and institutional forms of public financing at the sub-national level. The primary objective of this legislation is to consolidate the public finance system and add more transparency into the way tax money is spent. The central provisions of this new legislation revolve around budgeting at the local level, including more standardized and transparent ways to demonstrate local level revenue and expenditures especially by forcing local governments to consolidate their budgetary units. This is extremely challenging to local agencies in Poland[footnoteRef:16]. For example, in 2007 there were more than 600 auxiliary units of local government budget and over 2,000 local government budgetary establishments, of which a significant (although difficult to quantify) part is subject to complete liquidation. This law also shifts budgeting and reporting responsibility in a given jurisdiction to the local agency, since the responsibility for carrying out public tasks lie with the local government. This means that even if certain services are provided by private companies or Non-government Organizations, the budgeting responsibility ultimately lies with the governmental entity. These structural changes that take place as a result of the consolidation law should outright add more transparency to local level financing, however may add extreme difficulties to the local jurisdictions to comply with these changes. These fundamental changes are indeed a necessary process to create a modern local government environment. However, the challenges that go along with this consolidation program are only compounded considering the current situation in which government revenues are falling, public debt increases, and the overall economic downturn that is playing out on the global stage. The further significance of this law is the change that relates to the fundamental understanding and measuring of the financial situation in the public sector. [16: Minstry of Finance (2010). 2010 rok udany dla polskich finansw. Press Release by the Polish Ministry of Finance: 12 Dec 2010. http://www.mf.gov.pl/dokument.php?const=1&dzial=153&id=232699&typ= news Accessed Jan 31, 2015.]

Chapter 3Foreign trade of Poland during the global financial crisisThe global financial crisis turned to be less severe for the Polish economy and financial system than in many others countries in Europe or even in the world. Poland was the only one country in the European Union which in 2009 recorded, small but positive rate of economic growth. Particularly important for such situations were: the growth of domestic household spending and a situation in the Polands foreign trade. The objective of this paper is to present the situation in Polands foreign trade in conditions of the global financial crisis during 2008-2009 and to show the positive and negative phenomena in exports and imports. To achieve this objective first of all the Polands foreign trade statistics are analysed. The results show that the situation in Polands foreign trade was among others influenced by: a less economic openness, a strong depreciation of the domestic currency, a greater export diversification and a stronger decline in imports than exports[footnoteRef:17]. [17: National Bank of Poland (2008). Plan stabilnoci i rozwoju wzmocnienie gospodarki polski wobec wiatowego kryzysu finansowego. Narodowy Bank Polski. Pp 5-11.]

The financial crisis, which since September 2008 had started to spread globally, very quickly ceased to be only the crisis of the global financial system and became the economic crisis. The crisis affected the activity of many different actors from both the financial and the real sphere. It influenced, not only the decisions and plans of the financial institutions, governments, central banks, financial supervisory authorities, international financial organizations, but also the enterprises and households in many countries all over the world. The uncertainty about global economic growth prospects was one of the consequences of the crisis. During 2008-2009 the economic activity decreased (especially in the manufacturing sector), which entailed, among others the largest decline in the world trade since World War II. The growth rate of the global economy dropped from 5.2% in 2007 to about 3.2% in 2008 and to -0.5 in 2009. The volume of world trade decreased from 7.2% in 2007, to 2.8% the following year and to -10.7% in 2009. This was caused among others by a strong decline in demand (especially consumption and investment demand), a strong reduction of inventories, a fall of prices in international commodity markets and a weak lending activity[footnoteRef:18]. [18: Polish Ministry of Economy (2010). A study of Polands economic performance in the period of I-IX 2010. http://www.mg.gov.pl/files/upload/9142/3q2010_eng.pdf Accessed 27 Feb 2015.]

The global financial and economic crisis, did not remain without an impact on the Polands economy. But the impact was not so negative as in the case of other countries and Poland was the only member of the European Union whose economy did not fall into recession during the global crisis. Poland remained the green island in the European landscape. The strength of the Polish economy during the crisis was, among others, the situation in foreign trade. The aim of this paper is to present the situation in Polands foreign trade during the global financial crisis in 2008-2009 and to show the positive and negative phenomena in exports and imports[footnoteRef:19]. [19: Polska Agencja Prasowa (Jan 7 2011). Bank of America, Merrill Lynch: W Polsce wzronie inflacja i stopy procentowe.http://forsal.pl/artykuly/476661,bank_of_america_merrill_lynch_w_polsce_wzrosnie_inflacja_i_stopy_procentowe.html Accessed 29 Jan 2015.]

3.1 The situation on the current account of the balance of payments in the first years after Polands accession to the European Union

Polands accession to the European Union had changed the conditions of foreign trade. The adoption of the common European principles, notably the principle of free movement of goods and the common customs tariff, contributed to the elimination of tariff and non-tariff barriers in trade, as well as to minimization the existing physical, technical or tax barriers within the Community. Polish accession to the European Union had a significant impact on all the variables that determine the balance of payments, including the determinants of the balance on current account. A noticeable trend was the increasing deficit on current account, which steadily declined in previous years. According to the Urzd Komitetu Integracji Europejskiej (The Office of the Committee for European Integration) (2008) a similar phenomenon could had been observed in some other countries, which like Poland joined the EU in 2004.Despite this, it should be stressed that the Polish accession to the European Union had a positive effect on export growth, especially in the first two years when export volume rose by 45% compared with 2003. After the accession the average monthly level of exports was by 11% higher than before and in the case of imports by 5%. There was also a strong growth in exports to the new EU member states. It should be noted that the increase in exports occurred despite an increase in domestic demand and an unfavourable foreign exchange conditions. Though certainly those two negative factors reduced the beneficial impact of the EU membership on the dynamics of exports[footnoteRef:20]. [20: Sionko, Pawel (Aug 04 2010). Government announces temporary VAT rise to cope with fiscal pressures. PMR Publications. Accessed online: http://www.polishmarket.com/90150/Government-announcestemporary-VAT-rise-to-cope-with-fiscal-pressures.shtml 2 March 2015.]

In the fourth quarter of 2006, merchandise trade growth in imports (especially the import of intermediate goods) occurred to be greater than the increase in exports. And there was also a further deepening of the negative balance of income on the current account. The tendency of the faster growth in imports than exports remained also in 2007, which resulted in a deepening of the trade deficit in goods and, consequently, the deficit on current account. These negative trends also maintained in 2008 the year of the outbreak of the global financial crisis.

3.2 The foreign trade in 2008 the year of the outbreak of the global financial crisis

In the first three quarters of 2008 the trade deficit deepened. The growth in exports (21.3%) slightly exceeded the growth rate of imports in the first quarter (21.1%) of 2008, but in subsequent quarters there was a return to the negative trend - imports grew faster than exports. Significant impact on the changes in Polish foreign trade had the production networks developed by the transnational corporations. The growth of exports in the branches of foreign enterprises in the first three quarters of 2008, was influenced by the high demand growth in developing countries. The increase in exports during this period was also influenced by the new investment projects (particularly in the electronics sector). It is estimated however, that the strong appreciation of the Polish zloty during that period had rather a small effect on the changes in exports. The increase in imports, in turn, was affected by such factors as: high domestic demand (both consumption and investment), as well as the demand of the export sector for intermediate goods, the strong appreciation of domestic currency and an increase in prices of raw materials (e.g. crude oil) - the effect of which was weakened a bit by the strong zloty. The outbreak and spread of the global financial crisis from September 2008 caused a weakening of economic activity and a deep drop of the demand on the global scale, so the last quarter of 2008 was marked by a distinct fall in exports and imports and the ratio of current account balance to the GDP dropped to -5.2%.The decline in the external demand particularly negatively influenced the export of intermediate goods, as well as the group of goods classified as raw material (for example, the sale of copper in the fourth quarter of 2008 decreased by almost 20% and in the first quarter of 2009 - by 40% compared with the previous year). In this case, besides the drop in demand, the export performance was significantly affected by the decline in commodity prices in the international markets. Regarding the export of unprocessed products, in this case the lower external demand was not so severe. For instance in case of the agricultural products - the value of exports increased in the last quarter of 2008 by 5.8%. There were also no decrease in the export of chemical industry products (mostly the pharmaceuticals). The financial crisis very quickly started to negatively affect the automotive industry in the world. This tendency was confirmed by the decline of Polish exports when it comes to diesel engines, cars, car parts and accessories. It should be noted however, that the decline in export of passenger cars in case of Poland (in the fourth quarter of 2008 the value of cars sold was reduced by 9.6%) was not as severe as in other European countries. Mainly due to the introduction to production (several years ago) - small and cheap cars, which were more competitive in the European market. In the case of imports it should be noted that at the end of 2008 declines were recorded in almost all commodity groups (especially base metals, mineral products and transport equipment). But there was increase in import of consumer goods by almost 10% in the fourth quarter. It reflected the highest growth in Polish households expenditures in the whole EU - by 5.3% during that period. It should be mention that Poland is distinguished by the relatively large internal market this fact also helped during the crisis. Regarding the geographic structure of foreign trade in that period, the reduction in exports to countries outside the EU was smaller (although in the case of Ukraine, experiencing severe economic problems, one could speak of a collapse in exports). The recession and internal problems caused by the financial crisis brought about a sharp decline in exports to the new EU member states (especially the Baltic countries and Hungary); this trend also persisted in 2009[footnoteRef:21]. [21: Zesp Szk Ekonomiczno-Administracyjnych w Bydgoszczy. (2009). PKB w Unii Europejskiej w latach 2000 2008. http://zsea.bydgoszcz.pl/joomla/pliki/Tygiel/realny%20pkb.pdf Accessed Jan 31 2015.]

3.3 Recent developments in Polands foreign trade

The year 2010 was a period of recovery from the recession all over the world. The situation in Polands foreign trade should be assessed positively at that time. Exports in 2010 reached 117.4 billion EUR and the same was 19.5% higher than in the crisis year 2009, when it fell by 15.5%, but at the same time about 1% higher than in pre-crisis year 2008. This means that in early 2010 the restoration of pre-crisis level of exports had come much faster than had been expected. The imports in 2010 reached 130.9 billion EUR, but the growth (21.7%) did not offset the deep decline (by 24.5%) in the previous year. The result was that the level of imports turned to be by 8.1% (by 11.6 billion EUR) lower than in pre-crisis year. As a result, trade deficit, despite deepening to 13.5 billion EUR, was nearly a half lower than the one recorded before the crisis (26.2 billion EUR). Among the main reasons for the improvement in the situation in the Polish foreign trade in 2010 was: - improving overall economic situation in the main markets, especially in Germany; - rationalization of stocks and intermediate imports for export production; - relatively strong standing of the Polish banking sector, providing the necessary financing for exporters; - maintaining a relatively high price and cost competitiveness of Polish exports. In 2011 however the external environment of that Polands economy is unstable and very fragile. The problems in the Eurozone and the situation in the USA are among phenomena which can threaten the economic growth all over the world and affect Polands economy, therefore also the foreign trade[footnoteRef:22]. [22: Tradingeconomics.com (2010). Data and tables concerning Polands inflation rate. Available online: http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?Symbol=PLN accessed 31st Jan 2015.]

Chapter 4The Polish banking system during the crisis

Along with the rest of the economy and thanks to strict supervision, the Polish banking system is showing resilience and has avoided serious problems in 2009. Although Polish financial institutions were not involved in the purchase of "toxic" international assets, the high incidence of foreign ownership made them vulnerable to the outbreak of the global financial crisis, which has mostly affected Poland via the capital markets and the collapse of world trade. The first three quarters of 2009 were characterised by a decrease in confidence on the interbank market1 , by a threefold jump in loan-loss provisions and write-downs compared to 2008 and by the outbreak of a fierce battle for household savings. Bank profits dropped to around 50% of 2008 results and the return on equity tumbled from 27.4% in June 2008 to 11.8% in September 2009. At the same time, while being exposed to the global downturn, regional uncertainties and declining asset quality, the Polish banking sector may still be considered to be a promising growth market. As much as 44% of Poles still do not own a bank account; over 1.3 million current accounts were opened in 2009 alone and more are expected to be opened in the next few years. Demand for credit remains surprisingly strong and most Polish banks entered the financial crisis with relatively healthy fundamentals.In 2009, the landscape of banking in Poland was characterised by 51 banks, 18 branches of foreign banks, a branch network of 578 cooperative banks and 1800 small credit unions[footnoteRef:23]. Foreign owners had majority stakes in 37 commercial banks, which accounted for about 72% of the sector's assets. [23: Under the current legislation the SKOKs are not considered to be banks and hence are not regulated by the Polish Financial Services Authority.]

In contrast to the trend in previous years, 2009 was a year of consolidation. Inter alia, GE Money Bank merged with BPH, Fortis Bank Poland was consolidated with Dominet and integrated in the BNP Paribas Group, and finally the AIG Bank Polska sale was closed by an equity swap with Santander Consumer Bank Polska[footnoteRef:24]. [24: The last two transactions are a direct result of the financial crisis: Dominet Bank was linked to the Fortis group whereas the sale of AIG Bank to Santander was motivated by the new strategy of the American insurer to focus on domestic activities.]

Polish banks are predominantly domestic players and as such they have been partly insulated from the turmoil on foreign financial markets. The creditworthiness of the system is strengthened by the long term commitments of foreign shareholders, who view their Polish investments as strategic4 and continue to share know-how, improve the infrastructure and diversify the banking product lines. With a concentration ratio CR of 44%, competitive pressure in the Polish banking sector is still relatively low by Western standards and fees and commission revenue remains high. According to Eurostat, over 44% of Poles still do not own a bank account. In the EU, only Latvia scores worse with 48% of the population "excluded" from financial services. Since fees and commissions on basic banking operations (account and loan-related fees, brokerage services) were generating satisfactory profits, most banks and credit unions focused on expanding their infrastructure and on offering standard banking services rather than looking for more sophisticated and often riskier products. And since the Ministry of Finance envisages, within four years, sending 90% of pensions, grants, scholarships and other social benefits directly to payees' bank accounts, banks will continue growing their infrastructure in order to reach. Five million "bankless" new clients. This focus on infrastructure and on low-risk domestic operations partly explains the good shape of the financial sector in Poland in the first few months after the outbreak of the financial crisis.A clear weakening of the macroeconomic situation, deterioration in consumer and business sentiment, as well as continuing uncertainty on financial markets, have resulted in a severe contraction in banking activities. The year 2009 was much worse than 2008 or 2007. According to the Polish Central Bank (NBP) the projected end of year profitability of the sector was about 45% lower than in 2008 and roughly equal to profits in 2005. Since the outbreak of the financial crisis Polish banks have been focusing their efforts on redefining business models to the new low-growth market conditions. This means stricter cost control policies and a more cautious approach towards lending on the interbank market as well as towards corporate and retail clients. An important change has also occurred in the investment preferences of Polish bankers, who along with the rise in risk aversion expanded their portfolios of treasury securities from the Polish government[footnoteRef:25]. [25: Income from stocks and shares, FOREX gains and other financial operations.]

In the short run, the interest income of the Polish banks, traditionally their main revenue source, will remain under pressure as a result of relatively high deposits rates and decreasing interest rates charged on existing loan portfolios[footnoteRef:26]. Furthermore, fees and commissions income, the second most important source of revenue of the Polish banking industry, is not likely to contribute significantly to revenues due to sluggish sales of new loans. On the cost side, the still expanding infrastructure of branches and agencies, which has further risen from some 14700 at the end of 2008 to over 14900 units in September 2009, will make it difficult for the sector to avoid an increase in its operating expenses. This is likely to be the case although, for the first time in many years, the workforce employed by the banking sector diminished from 181 thousand in 2008 to 176.5 thousand in September 2009. [26: From PLN 593 billion in December 2008 to PLN 627 billion at the end of September 2009. To account for the extremely high volatility on the foreign exchange market these data on the increase of loans to the non-financial sector are being provided both in Polish zloty and in euro.]

Polish banks benefit from operating in a country showing economic resilience, which did not enter into recession in 2009. Overall, the Polish banking system has weathered the crisis well so far. Capitalization in the system is at a healthy 13.1% level and the rate of earnings retention was close to 100% in 2008 after the Polish Financial Services Authority convinced the financial industry to withhold its 2008 profits in order to strengthen balance sheets. Nonetheless, banks' fundamentals have deteriorated in the worsening economic environment. Notably asset quality has suffered a blow and earnings generation has seen a severe contraction. This rather mixed health of the sector is echoed by rating agencies such as Standard & Poor's, which considers the Polish banking industry to be an "average risk", placing it in group 5 out of the 10 groups in its Banking Industry Country Risk Assessment[footnoteRef:27]. The medium-term outlook for Polish banks will largely depend on developments in the job market and on the prospects for the corporate sector. These factors will impact directly payment delinquencies. The medium-term agenda of Polish bankers and regulators alike will continue to be dominated by the quality of assets as well as by liquidity and risk management considerations. [27: The Polish banking sector has therefore a lower risk than the corresponding sector in other Central and Eastern European countries, but a higher risk than in Western European countries, which generally rank in Groups 1 to 3.]

CONCLUSIONExploitation of the crisis topic by media during last four years and the own respondents experience in that matter caused that it is nearly impossible to be not aware of crises existence. The great majorities of respondents are aware of global economic crisis and perceive it mainly through consumers material status aggravation. Respondents are rather pessimistic and consider that economic crisis is perceptible in Poland and it will take a long time before it ends. More than a half respondent dont expect changes in their household financial situation in the next 12 month and nearly every third anticipates deterioration. In spite of creating Poland as a green island by Polish media, respondents feel, sometimes painfully, the economic crisis consequences in their households: available funds are sufficient only for current expenses in the case of 43% and for every tenth funds are insufficient even for current expenses. In the case of financial difficulties respondents are forced to use their savings, drastically reduce their expenditures, ask relatives for help or take extra work. The significant reallocation of consumption expenditures is visible. Respondents spend more especially on foodstuffs and such expenses as i.e. fuel. Increase of expenditures is mainly caused by higher prices. Contrary smaller consumption of some goods (alcoholic beverages, cigarettes, books, recreation, services, clothes and shoes) is connected with the attempt of expenditures limitation. Expenditures limitation in households caused by economic crisis forces a change (sometimes serious) in respondents lifestyle. They spend less on their pleasures such as holiday trips, entertainment, meals outside home, services associated with caring for body and beauty. Every fifth respondent chooses public transport instead of car, reduces consumption of electricity, gas and water and limits paid services associated with the house and its surroundings in order to save some money. Respondents are rather cautious and they do not believe in the lucrative possibilities on the present work market. They think that it is difficult to find a job in the times of crisis and it is too risky to change the job. The best forms of safe money investing in times of economic crisis in respondents opinion are Real estate and gold and jewelry. The crisis negatively affects the respondents mood and their perception of future: high concern dominates and pessimistic attitudes are noticeable: sometimes even panic and depression.The economic downturn has played a significant role in public sector financing in Poland. Arguably, Poland has faired much better than its European neighbours as being one of the only nations in the EU not to face a recession in 2009. Nevertheless, Polands economy is still described as emerging which subjects it to additional factors that could quickly weaken or further slow down its economic growth. To prevent the economic crisis from further damaging public sector financing Poland enacted specific policies and changes with the goal of fiscal stabilization and restoration of public sector finances. Polands response to the crisis can be viewed through the lens of five dominant themes: inflation; fiscal policy and deficit spending; public employment and pension reform; reliance on EU funding to supplement budget cuts; and fiscal consolidation and public finance at the local level. The goal of legislative and regulatory activity within these themes is clearly stabilization. The implications, however, of any policies remain somewhat indeterminate. Raising taxes in the middle of a downturn, while at the same time cutting a large number of public sector employees can just as easily backfire, considering the damage it may have on consumer activity; compounded by the external economic situation. Managing public debt and budget deficits is one of the foremost objectives of Poland. Still altering the pension system to increase, on paper, revenues will not, in reality, reduce the public debt. In most likelihood it is the Polish citizenry that will face the consequences. To what extent may never be known.

BIBLIOGRAPHYWebsites1) http://ec.europa.eu/economy_finance/publications/countryfocus_en.htm.2) https://www.cia.gov/library/publications/the-world-factbook/geos/pl.html3) http://www.ekf.vsb.cz/export/sites/ekf/frpfi/cs/prispevky/prispevky_plne_verze/Nistelroj_Krystyna_Mitrega-Niestroj.uprav.4) http://www.hippocampus.si/ISBN/978-961-6832-32-8/papers/jasiulewicz.5) http://www.imf.org/external/pubs/ft/scr/2013/cr13221.

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