Who's Afraid of Polish Election Pledges? Not JPMorgan or Allianz

  • Candidates pledge more spending in run-up to Oct. 25 ballot
  • At stake: 16th year of positive returns on Polish zloty bonds

If history is any indication, bondholders shouldn’t lose sleep over costly Polish election promises.

The opposition Law & Justice, leading opinion polls ahead of the Oct. 25 vote, has pledged to increase family subsidies and reduce the retirement age, measures the Finance Ministry says could double the budget deficit. Yet the same party during its previous stint in power until 2007 cut the budget gap to 1.9 percent of economic output, the lowest level in at least two decades.

“We are very confident that they will trim some of their pledges because in the past, when they were in office, they proved to be fiscally prudent,” said Michael Marrese, the head of emerging-market economics and strategy for Europe, the Middle East and Africa, at JPMorgan Chase & Co. in London. The bank is overweight local-currency Polish bonds.

For all their assurances, politicians are restrained by constitutional limits on public debt and a commitment to keep the budget shortfall to the European Union standard of 3 percent of gross domestic product. Continued fiscal prudence could help to extend the best quarter for Polish zloty bonds in a year and retain the country’s status as the only one never to have handed investors an annual loss among the 26 tracked by Bloomberg and the European Federation of Financial Analysts Societies since at least 2000.

“There’s a lot of pre-election talk and I expect politicians to be pragmatic post-election,” Naveen Kunam, a London-based senior portfolio manager at Allianz Global Investors, said in an interview on Oct. 2. “There could be some pressure on public finances after the election, but I don’t expect significant fiscal policy deterioration.”

As a “priority,” Law & Justice will provide 500 zloty ($133) a month per child to families with two or more children, Beata Szydlo, the party’s candidate for prime minister, said in September. The subsidy could cost up to 19 billion zloty per year, according to the party’s lawmaker Henryk Kowalczyk. President Andrzej Duda, whose surprise victory in May has led the way for Law & Justice to top polls, proposed cutting the retirement age at a cost his office estimates at 30 billion zloty over the next four years.

The ruling Civic Platform replied last month with pledges to curb payroll and value-added taxes, removing 16.7 billion zloty in annual government revenue. All of these commitments would add to a projected 18 percent increase in next year’s budget deficit to 54.6 billion zloty.

Positive Returns

The government expects a deficit of 2.8 percent of gross domestic product next year as the economy expands 3.8 percent. Law & Justice managed to reduce the fiscal deficit to a record-low in 2007 because of unexpectedly large revenues fueled by 7.2 percent economic growth, the fastest annual expansion rate in the last two decades.

The prospect of increased government spending has Esther Law, who helps manage emerging-market debt in Amundi’s $1.09 trillion of assets, looking elsewhere. Law prefers Hungarian and Romanian local-currency bonds over Polish securities, she said Oct. 2.

Zloty bonds returned 2.3 percent last quarter and are up 1.5 percent this year, according to a Bloomberg index. That compares with returns of 4.9 percent for Hungary and 2.7 percent for Romania year to date. 

The yield on Poland’s 10-year bond fell nine basis points to a five-month low of 2.57 percent, reducing the spread over similar-maturity German bunds to 202 basis points, the least since March. The zloty was little changed at 4.2452 per euro at 4:06 p.m. in Warsaw, leaving it 1 percent stronger this year.

Polish governments “have been prudent in terms of macroeconomics,” JPMorgan’s Marrese said. “Given the combination of government debt to GDP, the EU’s own deficit procedures and the general pragmatic nature of most Polish macroeconomic decision makers at both parties, there will be a cut back on some of their promises.”

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