Defense Funds Are New Priority for Polish State Development Bank
(Bloomberg) -- Poland’s development bank is switching priorities to bankrolling defense spending as the country ramps up military outlays amid an escalating war in neighboring Ukraine.
Most Read from Bloomberg
NYC's Underground Steam System May Be Key to a Greener Future
NYC Gets Historic Push for 80,000 Homes With $5 Billion Pledge
Trump Promises Could Have Seismic Impact on Washington Economy
NYC Mayor Adams Names Jessica Tisch to Lead Police Head Amid Probes
Tokyo’s Scorching Summers Focus Public Anger Against Tree Cutting
Bank Gospodarstwa Krajowego, which has sold debt to finance everything from pandemic aid to benefits for Ukrainian refugees, seeks to boost the specialized defense fund it manages to as much as 76 billion zloty ($18.5 billion) next year, Chief Executive Officer Miroslaw Czekaj said. That’s equivalent to 40% of the country’s planned military outlays for 2025.
Poland intends to spend 4.7% of economic output on defense in 2025 — a record high and roughly twice as much as in 2022 — as the conflict across its eastern border rages on and Donald Trump returns to the White House after calling on NATO members to bolster their defense budgets.
Issuance by BGK, which sells state-guaranteed bonds, has an outsized influence on the Polish government debt market. The quasi-sovereign has sold 257 billion zloty in debt over the past five years, including its first foreign-currency bonds dedicated to fund military spending last year.
Czekaj declined to detail the scale of BGK’s bond sale plans for next year, telling Bloomberg that issuance largely hinges “on the decisions of the government.” Foreign financing will help the bank to ramp up the Armed Forces Support Fund next year, he said.
Countries that supply Poland with military hardware, such as the US and South Korea, will provide a “majority” of the financing, according to Czekaj. This will create an external financing component for the dedicated military fund managed by BGK, and reduce the lender’s reliance on bond sales, according to the CEO.
“Funding from bond sales is only supplementary,” Czekaj, a former treasurer of the city of Warsaw, told Bloomberg News. “Nobody should expect we will flood market with new issuances.”
Meanwhile, bond sales for BGK’s Covid relief program are set to drop to 26 billion zloty next year from more than 50 billion zloty expected in 2024, he said.
Successive administrations have borrowed through the quasi-sovereign issuer — instead of directly by the government — to finance additional spending without amending the budget. Such moves come at a cost: less liquid BGK notes demand a yield premium over government debt.
BGK remains in close contact with the Finance Ministry over the lender’s issuance plans to ensure a smooth financing environment for the government as well as the quasi-sovereign, Czekaj said.
“Debt is issued after BGK and the Ministry of Finance agree on the terms of such securities, so that their characteristics, timing and markets are consistent with the government’s debt management policy,” the CEO said.
The debut sale of BGK’s defense-purposed bonds in October last year showed demand from leading US financial institutions as well as European investors, Czekaj said. Only a minority of potential buyers raised issues related to ESG values, according to CEO, while most showed “growing understanding that security needs funding.”
Yields on Polish government bonds have increased in past months due to looser budget policy as well as worsening sentiment to emerging-market debt. The extra yield investors demand to hold BGK’s dollar-denominated notes — issued as part of its Armed Forces Support Fund and due in 2028 — over the sovereign’s dollar bonds of similar length has averaged 40 basis points since the lender’s notes were sold last year.
Most Read from Bloomberg Businessweek
What Happens When US Hospitals Go Big on Nurse Practitioners
An Airline’s Florida Resort Dreams Look More Like a Nightmare
©2024 Bloomberg L.P.
