Poland Special | NBP helps financing fiscal boost
Polish government proposed generous fiscal stimulus in response to COVID-19 crisis. Volume of proposed packages amounts to PLN 330bn. NBP eased monetary conditions and started QE program to support bond market and provide favorable funding for fiscal stimulus.
Given the magnitude of the shock and the extraordinary measures, it is not a question of whether there will be a deficit this year, but how big it will be. We see it at 8.5% of GDP with public debt-to-GDP ratio raising to 56% (ESA). That number reflects the direct costs of the proposed aid within the ‘Anti-Crisis Shield’ and lower tax revenues. Financing via the ‘Financial Shield’ through the Polish Development Fund (PFR) will not immediately burden the budget.
To provide favorable financing conditions, the National Bank of Poland announced a QE program, alongside other monetary easing steps (interest rate cut to 0.5% (-100bp), repo operations and discount facilities to commercial banks). Under the QE program, the NBP became eligible to buy Treasury papers on the secondary market as well as state-guaranteed bonds. The latter were introduced to support financing through the Polish Development Fund.
Net issuance is set to increase substantially and an additional PLN 120bn at least is likely to be borrowed via the bond market during the year, while an additional PLN 100bn will come from the PFR. The NBP has already bought PLN 50bn of Treasury papers, which is roughly half of the new financing needs announced by the government this year. The NBP could buy another PLN 70bn (additional net issuance) and PLN 100bn (PFR financing).