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The Warsaw Voice » Business » January 26, 2012
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Zloty Under Pressure
January 26, 2012   
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With the Polish zloty weakened by turmoil in the eurozone, the government faces an ongoing battle to keep public debt in check.
Although Poland is one of the fastest growing economies in Europe, the Warsaw Stock Exchange and the zloty have felt tremors after almost every shock in the global or European economy. The main reason is that Poland is seen as an emerging market and lumped in together with other, less healthy economies in the region.

Łukasz Bugaj, an analyst at the BO¦ brokerage, says the zloty has been recently harmed not only by eurozone problems but also by the decisions of top rating agencies to downgrade Hungary’s credit rating to junk status. As a result, in early January, the zloty slid steadily against the euro, breaking the zl.4.50 barrier on several occasions.

It was only after Poland received a positive grade from the European Commission that the zloty stopped depreciating. The European Commission—in letter from Olli Rehn, the EU commissioner for economic and monetary affairs—said Poland had taken the right steps to reduce the government deficit this year. Although Poland’s budget deficit will overshoot the maximum allowable level of 3 percent of GDP this year, reaching 3.3 percent, it would not cross this mark if the costs of the pension reform were deducted.

Hungary, on the other hand, has not taken the necessary reform measures, the Commission said. The country faces financial sanctions—the suspension of EU funding next year if its public finances are not brought under control.

It would have been a bad sign for the markets if the Commission had said that the measures taken by Poland were insufficient to bring the deficit below 3 percent of GDP in 2012.

Poland’s Prime Minister Donald Tusk said the Commission’s decision should contribute to stabilizing the zloty.

Janusz Lewandowski, the EU’s budget and financial programming commissioner, also welcomed the decision. “The Commission decided that Poland was acting on its recommendations and was on the right path towards sound public finances,” said Lewandowski, who hails from Poland. “This may have a positive impact on how financial markets assess Poland. And financial markets have a lot of say.”

The positive assessment from the European Commission should, at least in the short term, strengthen the Polish currency, which has depreciated significantly against the euro and dollar in recent months. A weak zloty is a problem not only for those who have taken out mortgages denominated in foreign currencies but also for the government, which has to keep tabs on the level of public debt. Poland’s public debt is composed of domestic debt denominated in zlotys and foreign debt denominated in foreign currency. The latter accounts for roughly a third of the total, or well above zl.200 billion. The size of foreign debt depends on the exchange rate of the zloty. The weaker the zloty, the higher the foreign debt if converted into zlotys. And if the value of the debt in zlotys exceeds 55 percent of GDP, a threshold set by the Polish constitution, the government will have to balance the budget through additional spending cuts and tax increases.

At the end of last year, global sentiment deteriorated sharply, pushing the Polish currency downhill. A further weakening of the zloty meant the risk that public debt would exceed 55 percent of GDP. This is why the state-owned BGK bank and Poland’s central bank jointly intervened to strengthen the Polish currency. BGK pushed up demand for the zloty by selling EU funds it holds on behalf of the Polish government. The central bank sold euros from official currency reserves. Analysts estimate that several billion euros were sold.

Deputy Finance Minister Dominik Radziwiłł said this meant that at the end of 2011 the ratio of public debt to GDP was below 54 percent, compared with the 53.7 percent planned by the Finance Ministry under its public debt management strategy. Economists say the government wanted to keep the debt as low as possible. According to Jakub Borowski, chief economist at Kredyt Bank, the intervention was designed to further improve Poland’s credibility and strengthen its reputation in the eyes of international financial institutions. Since analysts at credit rating agencies are closely monitoring developments in the Polish economy, economists hope they will upgrade Poland’s rating at a time when other countries are threatened by downgrades. If so, Poland would pay lower interest on the money it borrows.

Forecasts for the currency market in 2012 remain cautious. In its latest projection, Polski Bank Przedsiębiorczo¶ci (PBP) predicts that the zloty may strengthen slightly against the euro in the course of the year. But in the next several weeks, there is a high risk of turbulence temporarily pushing the zloty down to levels close to 4.55-4.60 to the euro. As regards the dollar, PBP analysts predict it will strengthen against the zloty this year in the wake of its appreciation against the euro.

HSBC analysts are more optimistic. They predict that by the end of 2012 the Polish currency will strengthen both against the dollar and the euro. They estimate that the dollar and euro will cost zl.2.85 and zl.4.10 respectively at the end of 2012, followed by zl.2.62 and zl.3.80 at the end of 2013.

The strengthening of the Polish currency is expected to be coupled with more optimism on the Warsaw Stock Exchange. According to Adam Jenkins, head of the balanced and equity portfolio management team at Pioneer Pekao Investment Management, after a jittery first half of the year, the second half may bring an improvement on the exchange—on condition that liquidity and confidence rise as expected on global financial markets.

Poland’s Credit Rating Rock Solid: Rostowski
Poland’s credit rating has remained “stable and rock solid” over the past several years, despite 50 downgrades of various other European Union economies by the Standard & Poor’s agency, Poland’s Finance Minister Jacek Rostowski said in an interview with Radio Tok FM. Rostowski disagreed with the view that Poland may hope to benefit from the latest reduction of credit ratings for several EU member countries. He said that the contrary was true, adding, “the better for others, the better for Poland.”
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