Pensions and the great unknown

Probably better late than never but both Polish Presidential candidates have addressed the issue of pensions and the retirement age. The PiS candidate has of course gone down the populist route of stating that people will have to work till they die. Which completely misses the point that people are living longer with the Polish male now having a life expectancy almost a decade longer than when the Berlin Wall fell.

The incumbent President announced yesterday that he will present a parliamentary bill allowing workers to retire after “clocking up” 40 years “in harness”. What was not mentioned is the fact that there would not be an entitlement to a full pension for people who retire early and this will only accrue fully to those who work until the statutory retirement age. Now there is a difference between allowing people to retire early and bringing down the statutory retirement age. Just don’t expect the average journalist to understand this.

Which takes me back to the “debate” between the then Minister of Finance, the UK educated Jacek Rostowski and the architect of the transformation of the Polish economy Leszek Balcerowicz. Whilst I had a lot of time for Balcerowicz back then he does rather underline a different approach to economics than that espoused by John Maynard Keynes. JMK famously when asked a question as to why he had changed his mind replied “I don’t know about you but when I notice that the world has changed I change my view of it”. Unfortunately Mr Balcerowicz has not noticed that the whole economic paradign has shifted since he last held power and that red in claw capitalism does not provide all the answers.

However the main point is that the debate, which concerned taking back a chunk of pension funding into the State run ZUS from complacent fund managers, completely missed the point. Which is that there is very little difference between a state scheme based on current taxes paying for current penions, a state funded scheme (i.e. the state invests pension contributions to generate future cash flow) and a private investment fund based pension system. In every case pensions will ONLY be capable of payment if the economy in the future generates sufficient value added to support non working pensioners. In the case of an unfunded state scheme by way of taxes extracted from the productive and in the case of funded schemes only if the investments generate income.

In the case of funded schemes investment can be made within the given economy and hence that economy has to perform in the future. Of course some of the economy specific risk can be spread by investing in other economies. Except that what is a constant is that under performing economies sooner or later face devaluation of their currency (unless shielded by the Euro and assuming this strange currency is still with us in the future) and certainly by a higher cost of government borrowing.

So the real debate is actually how to ensure long term economic wealth and not how pensions are funded. And therefore the choise on Sunday is quite clear. Who is the safer pair of hands? The UK electorate has already decided. The Polish electorate has “two stabs at the cherry”, this coming Sunday in the Presidential elections and in the autumnal parliamentary elections.

Interest rates at record lows, what now?

Last week the central bank of Poland reduced interest rates by a full 0.5% with the headline rate now standing at an all time low of 1.5%. Most commentators believe the main reason for the move is the fact that the Polish economy is dangerously close to deflation. Now the reason deflation is a bad thing is the fact that consumers hold off purchases expecting proces to fall and manufacturers reduce stock. Which causes a down turn. So maybe holding interest rates relatively high was a bad move (hindsight is of course a wonderful things).

The question however remains as to whether near zero interest rates will in fact encourage businesses to borrow for investment and for consumers to buy more goodies (such as TV’s) on credit. As far as consumers are concerned it would appear that the major consideration with credit purchases is the amount of monthly repayments and not the rate of interest. For a short while the news of interest rate reductions can cause a feel good factor and of course for those with significant mortgages their disposable income increases. For corporations the key issue remains whether they believe that investment will pay off and whether the banks will be willing to lend.

There is another aspect to the equation. The central banks world wide primarily look to keep inflation within a narrow range. All well and good but what do the indexes measure? The average shopping basket which in a quickly changing world soon becomes misleading. And of course the inflation indicators do not measure asset inflation. With surplus funds looking for a home we have already seen a dramatic increase in house prices in the UK (well the South East at least). Stock markets have also bounced back.

But what of Poland? Will businesses invest in research and development and new technology as we are told is vital to achieve the next level of growth? Only if they believe there will be a market for the products. John Palmer from BNP Paribas Real Estate reports in a current review that the yield rate on Polish logistics properties has fallen to 7.15% to 7.25% having previously tested double figures and vacancy rates have dropped to 5.7%. The yield rate shows clearly that investors are back in the market whilst the fall in vacancy rates suggests that businesses are gearing up for increases in sales and hence need for warehouse space. Time will tell whether these are the first signs of growth rates increasing.

One of the key issues is that for the demand for employees to grow the Polish GDP has to grow more than gains in productivity. With the government side tracked by the double elections and having fallen into the trap of acceding to demands from public employees (miners amongst others) there is little chance that the still remaining barriers to business are removed any time soon.

What will the New Year bring?

With crude oil prices at record lows, the Polish currency regaining streinght and with reasonable growth forecasts will 2015 be a good year for the Polish economy?

The Russian economy in meltdown and the Ukraine facing an uncertain future it would appear that the eyes of Western investors are once more turning to Poland as the country enters the last phase of significant EU contributions to the economy. The new financing round is more specifically targeted and should generate significant growth opportunities for business. On the horizon there are two elections, first presidential in the spring which the current incumbent should win easily and then in the autumn parliamentary elections where although PiS is likely to gain most votes the PO and PSL coalition should gain a working majority. Clearly there is a need for a credible opposition with the capacity to govern rather than being an eternal gadfly on the back of the nation. Will such an opposition emerge is however a moot point as the last several attempts resulted in a once only electoral breakthrough above 5% and were followed by the total collapse of support. But with little alternative available alternatives on the economic policy front and at best irrelevant populist posturing there is actually probably no space for an effective opposition. Such is the modern world linked and voter apathy best described by the French word ennui.


In the words of a former US President “the economy stupid…”.

The real key issue will be how soon European banks in general and Polish banks in particular start once again financing business investment. Or just maybe the old behemoths need to be encouraged to fail and a return to an old style seperation of retail and investment banking reintroduced. And when will banks learn that property values are not predestined to be on a continious upward turn. Maybe adding property inflation indicators to central bank measures of inflation might reintroduce some stability?

The truth is that Polish banks, having in the main part avoided the previous property bubble, are better placed to start financing real growth which is all to do with current and future consumption and not asset financing. As with all assets if no one can afford inflated property related costs and share values unrelated to future performance then we have the perfect recipe for the next crash.