Ronald Schneider, head of the Bonds, CEE & Global Emerging Markets team at Raiffeisen Capital Management, in the 24 May edition of Börsen-Zeitung:
Poland - a relevant player
Poland’s image in Europe has fundamentally changed since Russia’s invasion of Ukraine. Although the country is formally still in the midst of a legal dispute with the EU – which is withholding payments from the coronavirus recovery fund due to rule of law violations by Poland – the two parties have been pushed closer together than ever before in the mutual fight against the aggressor Russia. Poland is playing a key role within the EU in the support for Ukraine, not only by taking in millions of refugees but also when it comes to arms deliveries. The country has clearly gone out on a limb and, in the process, positioned itself as a relevant political player at the centre of Europe. With regard to the bond market, neither yields nor the interest rate hikes have been positive for bond investors so far this year. And the zloty has also depreciated by more than 4% versus the euro since the beginning of the year.
This could change soon. International investors have now put Poland on their watch list. Because if the worst-case scenario – the spread of the war to further countries and thus incalculable consequences – does not come to pass in Europe, Poland may soon become a very attractive market for (bond) investors. Due to its size, Poland has a much stronger domestic economy – compared with Hungary and Czechia – and is thus less dependent on the economic development of the EU, although this naturally still plays an important role. In addition, Poland is no longer reliant on Russian gas deliveries.
However, Poland is also not immune to the inflationary pressure that is plaguing the global economy. In April, Poland’s inflation rose by another 2% month-on-month and by 12.4% year-on-year. This represents the highest inflation rate in 24 years. A further increase to 14 or 15% is not just possible according to analysts, but likely. In order to mitigate the impact of the massive inflation for consumers somewhat, the Polish government has adopted several measures that are initially limited to a period of six months. The value added tax on staple foods has been suspended since February, and the tax rate for petrol and diesel was cut by nearly two-thirds to 8%. These measures have prevented consumer prices in Poland from rising to the same degree as in Czechia, for instance. While Czechia already started taking monetary policy measures to counteract the high inflation to some degree with rate hikes in June 2021, the Polish central bank took a bit more time, waiting until October 2021. In the meantime, however, the Polish central bankers have very clearly shifted towards rate hikes and recently raised the key rate by 75 basis points to 5.25%. This led to sharp increases in yields and, amidst the rising inflation, further increased the pressure on bonds that had already built up in the second half of 2021. This was followed by a significant market correction, which caused the currency to become more attractive again over the medium term.
Has inflation peaked?
Provided that the geopolitical situation does not escalate further, the market believes that inflation will peak in Poland in the second or third quarter. This would mean that we are already approaching the peak and the end of the rate hike cycle. That will be the time when Poland becomes attractive for bond investors again. Because yields are already at 6.60% on the longer end of the curve now.
On the currency front, the zloty weakened amidst the developments outlined above and has recovered slightly again recently. Because Poland is an energy importer, the elevated energy costs are having a negative impact on the trade balance and current account balance. However, the financing can largely be balanced out via EU funds. This is also why these funds are extremely important for the capital balance of the majority of Eastern European countries, but particularly for Hungary and Poland. Based on the described measures to mitigate inflation adopted by the Polish government, it can be assumed that Poland’s budget deficit will remain relatively high. And the elections scheduled for the coming years will presumably not motivate the government to save, either. Poland’s rapprochement with the European Commission and the resulting possibility of having access to EU funds from the Next Generation fund and the budget would surely have positive effects on Poland’s future economic development and will be a relevant factor in overcoming the country’s challenges resulting from climate change.
The Eastern European Emerging Market currencies are always traded by global investors in the context of the euro/dollar currency pair due to the trade ties with the Eurozone and the geographical proximity. The euro/dollar exchange rate has trended very much in favour of the dollar – which has appreciated significantly globally and versus the euro – of late. Investors who believe that this trend will reverse in favour of the euro again generally also make purchases in Eastern European currencies because in addition to having positive currency forecasts, they also offer higher returns and interest rates. This is another reason why the outlook for the Polish zloty is good.