Poland's deputy finance minister, Piotr Nowak, a former fund manager and trader, tells Stefanie Linhardt about the country's public fundraising plans and the importance of a good relationship with the buy side, as well as Poland’s future within the EU and the health of its banking sector.

Piotr Nowak

Piotr Nowak

Q: The Polish economy has been showing some positive growth over the past few years and, according to the International Monetary Fund, is forecast to grow by 3.3% in 2018. Will there be any investments in your budget, such as the 500+ programme, to further boost the economy?

A: There will be no big spending like the 500+ programme, which gives every family 500 zlotys [$139] for every second and further child per month. There are plans to support small entrepreneurs, children starting education, and so on, but overall costs for the budget will not be high.

The programme we follow is focused on improving standards of housing and increasing the mobility of the labour force. Still, the main target for the Ministry of Finance is to keep public finances in shape. A key target for the government and the ruling party is to stay below the deficit threshold of 3% of gross domestic product because we don’t want to be put back into the excessive debt procedure [by the European Commission]. The risk-reward analysis shows it is not worth it.

For the past few years, the government has sought to improve tax collection, and this year the aim is to improve this further. We are fully aware that after we [picked] the low-hanging fruit, it will now get a bit tougher to keep up the speed of improvement.

Still, there is room to close some gaps in VAT. We are working on IT systems, artificial intelligence and data mining, and are hiring people for a new department which will do that. We will soon start to collect cashflow data from the banking system on a daily basis to identify fake companies. We will use artificial intelligence and data mining algorithms to find out who is suspicious before a company tries to disappear with some money. We will also focus more on transfer pricing because we believe that some big companies are not always paying their taxes correctly.

We have a lot to do in this field. Once we have achieved that, we can think of other things. Other small targets we have are to decrease the foreign exchange [FX] share of the public debt in the total debt – but that is marginal.

Q: You have just mentioned public debt. What are the key elements of your fundraising strategy?

A: Our main target is to have the biggest chunk of our needs financed in local currency debt. We have two tenders per month, every two weeks. Every tender provides two-year, five-year and 10-year bonds with fixed coupons and also five-year and 10-year floating rate notes.

We prefer to extend duration, but we don’t want to oversupply the market on the long end of the curve because the people who buy our debt also want those assets to behave properly. We talk to them, usually through the banks that are our primary dealers, and they talk to their clients, asset managers and so on to find out what the sentiment is like and what our investors prefer.

We also borrow in FX. This year it will most likely be in US dollars, because pricing is competitive with the euro. The vast majority of the issuance we do in currency we swap to euros because the euro is the natural partner for our economy. We have inflows from the EU budget in euros, so it is a natural hedge for us. So, [before] we issue in dollars or in yuan, we compared [the expected cost] to the euro after swapping the currency. If it is better for us, we issue in that currency.

The vast majority of the issuance we do in currency we swap to euros because the euro is the natural partner for our economy

Piotr Nowak

The US dollar is still competitive for us, and another thing is we could pay up a few basis points because the last time we issued bonds in US dollars, it was two years ago, which means the longest bond we now have in US dollar is eight years. So, to keep investors involved, to follow our credit and to keep the curve alive, we want to issue another 10-year – for traders, for portfolio investors, the curve should exist for up to 10 years to be alive. You should show up regularly to keep the yield curve alive and have people follow.

I used to be on the buy side, so I know that the relationship with the investor should be long term, very honest and transparent. That is very important to build a relationship and credibility.

Q: Are investors concerned about the government’s relationship with other EU members and the talk of the Article 7 procedure, which can suspend certain rights from a member state?

A: The toughest questions from investors came in 2016 and 2017 when we said we were going to start spending money for the 500+ programme. We spent a lot of time explaining how we were planning to finance it through improved tax collection.

When we were in Asia this year, people were also asking about Article 7, our relationship with the EU and our judiciary reform. But it is mainly the headlines that are generating the political noise. The prime minister met with [European Commission president Jean-Claude] Juncker and explained to him the rationale behind the changes. Reform was necessary. Currently, some amendments to the reform are under way to clarify any doubts.

If you take the World Bank’s Doing Business report, [enforcing] contracts was one of the weakest points in Poland, and businesses were demanding changes. When you have a dispute between companies, the case can take six to seven years. That is too long. I understand there can be some complicated cases, but 99% of the cases are not complicated. If dispute resolution was quicker, it would improve the environment for businesses, for investors and local companies.

We need more judges with a specialisation in business law, in white-collar cases. We need to increase them threefold to improve our system and change the way courts work.

With the new government [under prime minister Mateusz Morawiecki], tensions have reduced. The dialogue we opened with the EU shows that we want to be an active member of the EU and want to have a key role in Europe.

Q: You say Poland is committed to the EU. Will you join the euro?

A: Yes. But when, I don’t know.

Q: As deputy finance minister, you are also a member of the national financial supervisory authority KNF. How would you describe the health of Poland’s banks?

A: We have a very healthy banking sector. It is very conservative: take money for deposits and borrow mainly to give out mortgages or to lend to businesses. In 2008 there was not a scratch on our banking sector, and in 2010 to 2011, when there was a sovereign crisis in some countries in the south [of Europe], our banks were untouched and didn’t sneeze.

The confidence of our society in our banking sector is very high. The capitalisation is decent and risk managers and risk profiles are also very conservative. We also have a very good deposit guarantee scheme [DGS], which was started more than 20 years ago.

I am chairman of the council of the DGS, where we make some decisions as to how much money the banks should pay every year for the scheme or for the restructuring fund, because the DGS, since the implementation of the Bank Recovery and Resolution Directive, also functions as our resolution institution.

When we had a bankruptcy, people received their deposits up to €100,000 within seven working days. It was very efficient. It shows that our DGS is working.

The one thing where there is room for improvement is non-performing loans. NPLs in our sector are about 6%, above the EU average, which is about 4.5%, according to the European Banking Authority.

We also have some mismatch between assets and liabilities because our banks are mainly funded though deposits. This was also one of the reasons why the central bank, several months ago, didn’t want to cut the rates because it was worried that deposits could be taken out of the banks.

But the way our society and banking sector works, more banks are seeking to launch mortgage banks, through which they can issue covered bonds with longer tenors.

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