Zloty Fate Hinges on Scale of Opposition Ballot Win, Poll Shows

  • Economists predict zloty slump if party wins election outright
  • Currency seen steady or higher in no-majority scenario

An outright victory by Law & Justice in Poland’s general election may knock the zloty weaker, while the currency is set to be little changed if the poll-leading opposition party fails to gain a majority in Sunday’s ballot.

Eleven of 15 economists surveyed by Bloomberg expect the zloty to depreciate against the euro through the end of 2016 if Law & Justice wins a majority, while four predict little or no change. If the party falls short of 231 seats in Poland’s 460-member lower house of parliament, hurting its chances of passing legislation without outside support, nine economists saw the currency little changed, and six expected appreciation.

Law & Justice advocates a bigger state role in the economy and a tougher stance against refugees. It seeks to boost spending on family benefits, cut the retirement age and reduce taxes for smaller companies. Prime Minister Ewa Kopacz, whose Civic Platform party is trailing in opinion polls, has warned the spending promises could destabilize public finances and jeopardize her government’s reduction of the budget gap to below 3 percent of economic output from 7.8 percent five years ago.

“Law & Justice is more prone to spend more than the Civic Platform should it win the elections,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, Germany. “The general downward trend in emerging markets, fueled by more fickle investor sentiment and higher political risk” may also undermine the zloty, he said.

Public opinion polls show Law & Justice winning the Oct. 25 election but are mixed over whether the party will gain a majority.

Bearish Contracts

The zloty weakened 0.3 percent to 4.2593 per euro on Tuesday, curbing its year-to-date gain to 0.7 percent, compared with gains of 2.2 percent for the Czech koruna and 1.9 percent for Hungary’s forint. Derivative contracts imply a 30 percent probability of the zloty slumping 10 percent against the euro by Dec. 31, 2016, compared with a 14 percent chance of it appreciating by the same amount in the period, data compiled by Bloomberg show.

Law & Justice has said it expects to add as much as 34.5 billion zloty ($9.2 billion) to budget revenue annually from special levies on banks and large supermarkets as well as better tax collection. Jakub Borowski, an economist at Credit Agricole SA in Warsaw, argues that there’s an imbalance as the spending increases could come as early as next year, while expected extra budget revenue, especially from tightening tax loopholes, could take years to arrive.

Economists expect the deficit to widen next year to a median 3.1 percent of economic output, the survey shows. The shortfall would be 2.9 percent if Law & Justice fails to secure a majority, according to the poll.

The first fiscal test will be the 2016 budget, which needs to be approved by parliament by Jan. 31 and is subject to rules meant to prevent spending with abandon. Any attempt to tinker with the deficit could be taken badly by investors and “would result in higher yields and a weaker zloty,” said Marta Petka-Zagajewska, an analyst at Raiffeisen Bank International AG’s Polish unit in Warsaw.

The yield on Poland’s 10-year government bonds, at 2.74 percent on Tuesday, may rise to 3.23 percent by the end of next year if Law & Justice becomes the country’s first party since 1989 to win more than half of the seats in parliament, according to the survey.

EU Funds

The party’s spending plans may be toned down to avoid putting at risk 106 billion euros ($121 billion) in subsidies from European Union development funds, said Michal Dybula, an economist at BNP Paribas SA in Warsaw.

“No government will be able to widen the budget deficit above 3 percent of GDP, as this would mean another excessive-deficit procedure against Poland and the risk of losing access to EU funds,” he said.

During Law & Justice’s last term in office in 2005-2007, gross domestic product expanded at the fastest pace in two decades and the budget deficit narrowed to 1.9 percent of GDP. The zloty strengthened 0.4 percent per euro in 2006 and a further 6.5 percent in 2007, before slumping 13 percent the following year after, when the collapse of Lehman Brothers Holdings Inc triggered a global credit crunch.

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