• Assets were `oversold' amid budget risk: finance minister
  • Szalamacha: economy to get boost from subsidy plan in 2016

Poland’s new Finance Minister Pawel Szalamacha has advice for investors spooked by the sell-off in the country’s markets: The assets are oversold and the government is committed to keeping the deficit in check.

Poland’s zloty, bonds and stocks have all dropped since the Law & Justice party won elections in October. The declines have been driven by concerns that planned spending increases won’t be offset by better tax collection and new levies on banks and retailers.

Pawel Szalamacha
Pawel Szalamacha
Photographer: Piotr Malecki/Bloomberg

“The message for foreign investors is that they are welcome,” Szalamacha, 46, said in an interview at the ministry’s Warsaw headquarters on Tuesday. “We’re committed to sound public finances, but we expect investors to understand that we have an ambitious family-support agenda, which we will implement.”

Law & Justice won after pledging to boost welfare spending and champion national interests, luring voters who failed to benefit from economic growth. As the government seeks to implement its agenda, which includes cutting the nation’s reliance on foreign capital, it needs to avoid undermining its $215 billion debt market and position as a “regional safe haven,” a tag it was given by Moody’s Investors Service. 

Since Law & Justice won elections, Warsaw’s WIG20 stock index has tumbled 16 percent, an index of Polish local-currency government bonds dropped 1.4 percent and a gauge of the sovereign’s foreign-currency bonds has declined 1.2 percent.

Political Trigger

Szalamacha said the sell-off may have been triggered by “politics and associated discussions over long-term economic policy.” A revision of the 2016 budget, which keeps the deficit target at 2.8 percent of gross domestic product, should first lower the zloty’s volatility and then help “flatten out” markets, he said.

“I expect this excessive market sensitivity to fade out,” Szalamacha said. “We may have an element of overreaction on the side of the market.”

Development Minister Mateusz Morawiecki last week criticized an “addiction” to foreign capital as an outdated model for the Polish economy. Still, there is no bias against international investors and no plans to suddenly curb bond sales in other currencies, Szalamacha said.

While Szalamacha wants to “gradually” cut dependence on foreign-currency bonds over the coming years to below 30 percent from about 34 percent now, it will only come when “market conditions, the price of money and interest rates” are right.

Foreign Debt

“At the moment, it’s quite sensible to take on debt in euros or Swiss francs,” Szalamacha said. Poland has the equivalent of $2.8 billion in euro- and Swiss franc-denominated notes due in the first quarter of next year, which will probably be refinanced in the “same currencies,” he said.

Law & Justice is basing its 2016 budget plan on the assumption of 3.8 percent economic expansion, faster than forecast by the central bank and the International Monetary Fund. Szalamacha said the government’s flagship program, giving 500 zloty per month in child subsidies, will spur growth by “stimulating consumption and improving consumer sentiment.”

He said a change to the central bank’s mandate, which would add to the institution’s responsibility for stimulating growth and was discussed by Law & Justice before the election, is not currently “on the table.” Szalamacha said a targeted program to develop selected industries is a pre-requisite for any central bank plan to offer cheap credit, along the lines of the Bank of England’s Funding for Lending initiative.

“This has to match a certain strategy to strengthen Poland’s industrial base, and monetary policy is only one of the tools to achieve that,” the minister said. There is no present need for a monetary expansion program modeled on the European Central Bank’s Long-Term Refinancing Operation, or LTRO, he said.

Zloty Interventions

The government’s hasn’t considered intervening on the market to shore up the zloty, which has weakened 6.1 percent to the dollar and 2.9 percent per euro over the past three months, the fourth-worst performance among 24 emerging-market currencies tracked by Bloomberg.

The zloty “is not in a free-fall and intervening in the market is almost always costly and it rarely brings lasting effects,” Szalamacha said. “Rather than spending cash and achieving results for a few hours and sometimes not even days, I would rather work on stopping the trend and reversing it with solid measures, budget stability, the ability to refinance debt and good performance of public finances.”

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