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Cablegate: Polish Economy Not yet Hurt by Rising Oil Prices

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A
SUBJECT: Polish Economy not yet Hurt by Rising Oil Prices

This cable is sensitive, but unclassified, and NOT for
Internet distribution.


1. (SBU) Rapidly increasing oil prices have had a limited
effect on the rate of inflation in Poland to date. Over the
past 12 months, the average zloty price of oil has increased
12 percent, while the consumer price index rose only 1.3
percent and producer prices remained unchanged.
Nevertheless, most analysts agree that the skyrocketing
price of oil is a long-term threat to Poland's economic
growth. To date, however, high unemployment, low wages, low
food prices, weak domestic demand, and the strong zloty have
kept inflation under control and mitigated the impact of
increasing oil prices.

--------------------------------------------- ------
Increasing Oil Prices Have Limited Effect - to Date
--------------------------------------------- ------

2. (U) The price of unleaded gasoline has risen 6.9 percent
since August 2004 in Zloty terms, while the price of diesel
oil has climbed 15.8 percent. For Poland, which is an oil
consumer rather than a producer, the most noticeable effect
(aside from at the gas pump) has been the higher cost of
imported materials. Higher production costs in the
manufacturing sector have reduced profitability and
negatively affected investment demand. So far, Polish
households are continuing to purchase gasoline at the
expense of some reduction in spending on other goods.
Studies by the National Bank of Poland show that rising oil
prices have a negative effect on demand in the short and
medium term. Thus a 10-percent increase in the price of oil
may lead to a 0.2 percent decrease in GDP over 6-8 quarters.

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--------------------------------------------- -----
CPI up only 0.5 percent due to low Domestic Demand
--------------------------------------------- -----

3. (U) Demand shocks have an effect not only on economic
activity, but also on the consumer price index (CPI). The
share of fuel prices in Poland's inflation basket is 3.84
percent. Thus, the average 12 percent increase in fuel
prices over the past 12 months added an extra 0.5 percentage
points to the annual CPI. In contrast to this direct
effect, the indirect impact of changes in energy on the
prices of other goods and services is hard to estimate. In
times of high consumption, increasing fuel prices are almost
immediately reflected in the prices of such goods as food,
shoes and refrigerators. When domestic demand is low, as is
the current case in Poland, the effect is usually delayed.

4.(U) So far, the Polish National Bank reports companies
have refrained from hiking prices for goods to avoid a loss
in market share. The companies accept lower profits by
absorbing increased production and transportation costs,
expecting an increase in demand in the near future. This
behavior considerably reduced the increase in the CPI in
Poland during the first half of 2005. However, most
analysts expect consumption to pick up in the latter half of
the year, and companies are acting accordingly.

5.(SBU) Experts figure that the price of goods in Poland
will start to jump significantly only after oil hits $75 per
barrel. According to Marek Zuber, an economist from the
Internet Brokerage House (IDM), a $100 per barrel oil price
would increase the CPI by 0.5 - 0.7 percent. Most
economists agree that starting in September, inflation in
Poland will begin to rise, but that at year-end it will
still be only around 1.8 percent, or well below the Monetary
Policy Council's average inflation target of 2.5 percent.
Thus, the Monetary Policy Council cannot use higher oil
prices as a strong argument against further interest rate

A Drop in Russian Oil Prices would help

6. (U) The recent prediction by Russian Minister of Economy
German Gref that the average price of Russian oil will fall
to $48 per barrel by end 2005, if realized, would be good
news for the Polish economy. Poland uses Russian Urals' oil
and processes it into gasoline considered expensive by
Polish consumers. Polish refiners are cautious about
hazarding predictions of a drop in future prices. PKN Orlen
and Polish Nafta experts estimate that a drop in oil prices
of 10 percent translates into a few percent decrease in
gasoline prices, provided that other factors - such as
exchange rates - remain unchanged.

--------------------------------------------- --
Ministry of Finance won't budge on Excise taxes
--------------------------------------------- --

7. (U) Despite strong pressure by fuel companies and
consumers to reduce excise taxes, the Ministry of Finance is
not contemplating a decrease. The Finance Ministry believes
market mechanisms such as the strong zloty and falling
inflation are more efficient in controlling fuel prices in
Poland than fiscal adjustments. It also notes that excise
tax cuts often do not reduce retail gasoline prices because,
in practice, they are often absorbed by fuel producers,
wholesalers and retailers.


8. (U) To date, the impact of rising oil prices on the
Polish economy has been surprisingly limited. Low domestic
demand, high unemployment, low wages, and low food prices,
combined with a stronger zloty have kept inflation moderate.
However, many analysts now expect that the ultimate impact
will take six to eight quarters to ripple through the
economy. As the price per barrel of oil hits new highs, it
is harder and harder to discount the likelihood that it will
impose real costs on Polish companies and consumers.

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