Aberdeen Sours on Poland as Policy Shakeup Spurs Worst Bond Rout

  • Szabo changes stance on Polish bonds after budget-rule tweak
  • Polish yields climb most in emerging markets this month

Aberdeen Asset Management Plc is pulling money out of Polish bonds, saying the country’s new leaders are undermining safeguards aimed at keeping public spending and politicians in check.

The money manager started selling Polish long-term local-currency notes last week as the ruling Law & Justice party, which swept into power in October, proposed easing rules in place to restrain public spending, according to Viktor Szabo, who helps manage $12 billion of emerging-market debt for Aberdeen in London. Polish yields have risen the most among developing countries this month.

“The pillars of Poland’s institutional framework are being attacked and I’m pretty sure we’ll see more of that in the future,” Szabo, who is buying Romanian debt instead, said by phone on Wednesday. “The change is too much, too fast, too abrupt.”

One policy that’s spooking investors is a proposal to loosen limits for the budget so the government can spend an additional 5.7 billion zloty ($1.4 billion), according to Finance Ministry projections. In another, the Law & Justice party last month overturned the appointment of judges on a tribunal that rules on the constitutionality of new policies -- a move the existing panel deemed illegal on Wednesday.

The yield on Poland’s 10-year zloty government bond rose four basis points to 3.02 percent at 3:35 p.m. in Warsaw on Thursday, the highest since Sept. 16. The zloty has weakened 1.7 percent against the euro this month.

Dmitri Barinov, a money manager at Union Investment GmbH in Frankfurt, said he’s considering buying bonds after the declines as the government has pledged to observe the European Union deficit threshold of 3 percent of gross domestic product.

“I am not worried” as long as Poland sticks to the EU target, Barinov, who now has a a neutral stance on Polish government bonds, said by e-mail on Wednesday.

Poland sold 6.7 billion zloty of bonds due in 2017, 2021 and 2026 at an auction today, at which investors rolled over debt maturing in January, April and July next year.

To boost its ability to increase outlays, the government plans to modify the formula it uses to calculate the cap on spending. In particular, it will base the calculation on the central bank’s inflation target -- now 2.5 percent -- rather than on the prevailing rate of price growth. The lower chamber of parliament approved today the plan that will apply to the 2016 budget. It must now go to the upper house controlled by the ruling party and the president, a former Law & Justice party member.

After declining every month since July 2014, consumer prices are forecast to rise 1.8 percent in the fourth quarter next year.

Higher spending may increase the premium investors demand to hold Polish assets, Michal Burek, an economist at Raiffeisen Polbank SA, said in a report last week. He predicted the change would increase spending by 7.9 billion zloty in 2016.

Special Taxes

The extra yield on Poland’s 10-year bonds over similar-maturity German bunds rose to a five-month high of 245 basis points on Thursday.

In addition to the slump in bonds and the zloty, stocks have declined amid government plans to fund increased spending with special taxes on banks and retailers. The WIG20 Index has lost 6.7 percent in December and down 22 percent in 2015, heading for its worst annual performance since the global financial crisis erupted in 2008.

The government’s new taxes won’t be enough to meet its higher spending needs, according to Aberdeen’s Szabo.

“You can tweak the deficit here and there, but the figures are just not adding up,” he said. “It’s a gloomy picture in the medium term.”

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