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The Warsaw Voice » Business » February 18, 2009
ECONOMY
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Zloty Slides
February 18, 2009 By Andrzej Ratajczyk   
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The sharp weakening of the zloty means trouble for borrowers who have taken out loans denominated in foreign currencies, mainly the Swiss franc and the euro. It also means a threat to the economy as a whole.

For the past two years, the Polish currency was steadily strengthening against major currencies. Last July, the euro cost only zl.3.2 while the dollar traded at zl.2. Never before had the dollar been so weak. But not everyone liked a strong zloty. Exporters had a special reason to worry because they were getting less money, converted into zlotys, for their goods. Not surprisingly, exporters' organizations started to demand that the government take action to bring the zloty down. But state intervention on the currency market turned out unnecessary because in September the zloty started to weaken. Then, at the beginning of this year, the zloty went into freefall, slumping to record lows in the first week of February when the euro traded at over zl.4.7, the dollar at almost zl.3.7 and the Swiss franc at almost zl.3.2.

The main reason for the sudden weakening of the Polish currency was another sharp deterioration in foreign investors' sentiment towards emerging markets. But in contrast to December, when the zloty had been virtually the only currency in the region to lose against major currencies, this time the Polish currency was accompanied by the Hungarian forint and the Czech koruna. In January, the forint hit an all-time low to the euro and other currencies. The Czech koruna also plummeted.

Headache for businesses
Few people are happy about the recent sharp depreciation of the zloty. The weak zloty has already brought huge trouble to businesses that have bought currency options, and is putting pressure on households that have taken out loans denominated in foreign currencies. The opinion that a weak zloty is good for exporters is only partially true. With a stronger euro, exporters selling their goods in the euro zone have an opportunity to earn more, but only on condition that eurozone countries want to buy Polish-made products. And those countries are not buying at the moment. European consumers are turning to goods made in their own countries to boost domestic production and thus protect their jobs. As a result, Poland's export revenue will be much lower this year.

A strong euro and a strong Swiss franc are a drain on Polish consumers' pockets. But a strong dollar is also a problem because it means higher prices of raw materials, including oil and natural gas. In the near future, gasoline and diesel prices are likely to go up, which in turn will translate into higher prices of transport services and many consumer goods.

Prof. Stanisław Gomułka, chief economist at the Business Centre Club, believes the weakening of the zloty is due to the outflow of portfolio capital from Poland to countries with lower investment risk. But he views the weakening as temporary. "Changes on the currency market should take place within a year," Gomułka told the Polish Press Agency. "If the appetite for risk on the part of international investors grows, their interest in such countries as Poland will also increase. One can expect a very strong inflow of U.S. Treasury securities onto financial markets. As a result, in a few months the dollar may stop strengthening and may even go down. If this is the case, the interest of foreign investors in Poland and emerging markets will automatically grow."

European Union funds may also help the zloty's recovery. "Part of the over 60 billion euros to be transferred to Poland from the European Union in the medium term will go directly onto the market rather than being transferred through the National Bank of Poland," Prime Minister Donald Tusk said on Feb. 6. "Poland has the resources and tools which can be used at the right moment. For the time being, no such urgent need exists. We are convinced that the exchange rate will stabilize at a sensible level." The market calmed on these assurances and in the second week of February the zloty bounced back.

Slim chances
However, analysts believe that chances are slim the zloty will strengthen sharply as early as the first half of 2009. "Because of the expected interest rate cuts, we are not optimistic about the zloty's behavior in the first half of the year," says a February report by the Swiss bank UBS. "Our projection for the second half of the year is more balanced." According to UBS analysts, Polish economic fundamentals are sound, which makes Poland one of the most attractive countries in the Central and Eastern European region, despite a slowdown in 2009. Analysts project that Poland's GDP growth will slow to 1.9 percent this year from 4.8 percent in 2008 and will be lower than the growth rate expected for Slovakia, which adopted the euro on Jan. 1. "But if Poland heads for the eurozone effectively, this will support the economy and make people feel more secure," the UBS report says.

Fitch Ratings, in a report published in early February, predicts that Poland's real GDP growth will slacken to 1.2 percent this year. Fitch's current rating for Poland is A- (A minus) with a stable outlook. According to Fitch, the expected economic slowdown, coupled with more expensive and restricted access to external funding in the form of bank loans and bonds, will have a negative impact on the Polish business sector in 2009. Another challenge is the sharp weakening of the zloty to the euro and dollar. It has affected the balance sheets of the companies that have loans denominated in foreign currencies not fully hedged against currency risk.
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