Zloty is looking less dodgy as stimulus policy boosts Poland
ON THE face of it, things are looking a bit dodgy for the Polish zloty at the moment. Last week, the currency sunk against the euro. The euro has strengthened against the currency, rising to 4.16 zloty today from 4.0864 on 7 September.
On top of this, there was a failed government bond auction last week – investors bought just over half the five-year notes on offer from the Finance Ministry. This lack of investor confidence came just days after the government said the budget deficit would almost double next year, which was seen as very dangerous for the county’s fiscal outlook. Analysts recommended selling Polish bonds across the curve.
Adding to the bad news for would-be investors in Poland was the shock current account deficit in July, which showed a deficit of €565m, down from the €459m seen in June and well below analysts’ consensus expectations of a €215m surplus.
As a consequence, analysts have started to become rather bearish on the Eastern European currency over the past week or so.
BIGGEST EXPOSURE
Just when you thought things couldn’t get any worse for poor old Poland, ratings agency Standard & Poor’s highlighted the fact that foreign currency lending – that is, loans denominated in other currencies – is rising in Poland. This is particularly worrying because it is seen as the country’s biggest exposure to the financial crisis.
In May 2009, about 40 per cent of total retail lending was in foreign currencies (compared with 31 per cent at end-2007), which is much higher than the corporate sector’s foreign currency loans to total lending (26 per cent on the same date), said S&P. This is very dangerous because borrowers are exposed to currency fluctuations of the zloty. If the zloty weakens then the real value of their loans surges.
On the face of it, you might be forgiven for being gloomy about the zloty. But despite all the bad news, a case can be made for being bullish on the currency. Poland was the only eastern member of the European Union to escape a recession since the start of the credit crisis. Its relatively large internal market, stimulated by tax cuts, helped offset a decline in demand from overseas, while a depreciating Polish zloty earlier this year cushioned the fall in exports.
Poland’s success, especially when compared to the state of its beleaguered Baltic neighbours, ought therefore to be attracting investors from far and wide to the once communist state, and support the Polish zloty.
Furthermore, the currencies of both Hungary and the Czech Republic have outperformed the zloty against the euro over the past couple of months. The three currencies are considered to be similar in many respects – they are the three eastern European currencies which have made most strides towards liberalisation and privatisation and when one goes, the others usually follow. This all suggests that the Polish zloty has further to rise and it can be expected to come in line with its peers.
Also supporting a rise in the zloty is a favourable medium-term outlook for the Polish economy. The European Commission now expects it to grow by 1 per cent in 2009, having previously forecast just 0.8 per cent.
S&P analyst Kai Stukenbrock is also optimistic. He wrote in a note earlier this week that Poland’s economic prospects have improved and the country’s “benign” fiscal outlook will help to reduce the budget deficit in 2011. In an upbeat assessment, he said: “In terms of how well the Poles have weathered the crisis, they can probably afford to boast.”
LOOKING ROSY
Nobody is going to start saying that Poland’s current account is looking rosy, but its 1.1 per cent GDP growth in the second quarter is frankly far better than what most Western European countries have experienced, inflation is expected to remain stable and the central bank has likely finished cutting interest rates to stimulate the economy.
And these stimulus measures have had an effect. The country’s domestic sector, which makes up more than two thirds of total output, has been supported by government stimulus measures and has protected the economy from a global decline in trade.
Although S&P is still relatively concerned about the impact of a rise in foreign currency lending on the Polish banking sector, it affirmed its A- ranking on Poland’s long-term foreign-currency debt in August, the fourth-lowest investment grade, and maintained its stable outlook.
With little chance of a ratings downgrade in the near future, investors should not be too worried about the Polish zloty going forward and should expect the central and east European countries to move back into line with its neighbours, the zloty rising as the forint and Czech crown dip slightly.
Continued strength in domestic demand should also offset any impact of falling trade until overseas demand starts to pick back up and businesses start feeling confident enough in the global economy to start investing again. The zloty is maybe not as dodgy as it seems at first glance.