Top Zloty Forecaster Sees Biggest Loss in Five Years on Politics

Updated on
  • Barclays sees currency weakening to 4.5 per euro by end-2016
  • Zloty to suffer from political turmoil, interest-rate cuts

Even with Poland’s zloty trading at some of its weakest levels in a year, think twice about banking on a rally. The most accurate forecaster of the currency is also among the most bearish.

Barclays Plc, which topped Bloomberg’s fourth-quarter rankings for euro-zloty predictions, says Poland’s currency will drop 3 percent in 2016 as the central bank halves its main interest rate and the new government strains public finances with its populist policies. While other banks are cutting their forecasts, the median estimate in a Bloomberg survey is still for a rebound.

The start of 2016 suggests Barclays is right to be bearish. The market turmoil spreading from China is hurting assets in developing countries like Poland. That’s fueling speculation that the nation’s new intake of central bankers, who will be picked by the ruling party in coming weeks, will lower borrowing costs to spur growth and inflation in the European Union’s biggest eastern economy. A political crisis is also brewing, with protestors taking to the streets to complain the administration is violating the constitution’s checks and balances.

“The inflationary outlook continues to be subdued in Poland and there’s significant scope for policy easing in 2016 that’s not being priced in by markets,” said Aroop Chatterjee, the London-based head of Europe and Latin American local-markets strategy at Barclays, who sees the zloty sliding to 4.5 per euro by year-end, from 4.3846 at 3:15 p.m. in Warsaw on Thursday. “The other issue is populism and risks on the fiscal front.”

Five Years

Chatterjee’s prediction would see Poland’s currency dropping 5.6 percent from the end of last year, its biggest annual loss since 2011.

Barclays is the most pessimistic forecaster in Bloomberg’s survey of more than 30 strategists, though London-based adviser Capital Economics Ltd. -- which isn’t included in the survey -- cut its year-end estimate this week to 4.6 per euro, from 4.1.

The median estimate compiled by Bloomberg is for an advance to 4.15. That’s down from 4.06 as recently as early-November.

The zloty had a mixed year in 2015, rallying 5 percent in the first quarter on optimism about the strength of the economy, before succumbing to the slide suffered by most other emerging-market currencies. The zloty’s 0.8 percent slump on Thursday took it to its weakest level since December 2014.

Pulling Investment

Aberdeen Asset Management Plc started pulling money out of zloty assets more than a month ago, citing proposals by the ruling Law & Justice party, which came to power in October, to ease rules aimed at restraining public spending. Polish President Andrzej Duda has also passed laws making it harder for the constitutional court to overturn legislation.

Eight of the 10 members of the central bank’s Monetary Policy Council will see their terms expire by the end of February, and the authorities have said they want to replace them with candidates who support lower interest rates. A group of nominees testified before lawmakers in Warsaw on Tuesday, and their remarks in favor of using policy to stoke growth reignited speculation about a cut to borrowing costs.

Worst Performer

“It looks like these candidates will be more pre-disposed to ease monetary conditions,” William Jackson, senior emerging-market economist at Capital Economics, wrote in a note. “We now think the zloty is likely to be the worst-performing currency in central Europe.”

Barclays’s Chatterjee expects officials to reduce the record-low 1.5 percent main rate by 0.75 percentage point this year.

The outgoing rate-setting committee left interest rates unchanged today, keeping borrowing costs on hold since March when it announced the end to an almost three-year easing cycle. Officials argued that the below-zero inflation that’s persisted since mid-2014 posed no threat to growth, which economists surveyed by Bloomberg forecast to be 3.5 percent this year, more than twice that of the euro zone.

This relative economic strength is the reason Nordea Bank AB, the second-best forecaster last quarter, is optimistic about the zloty. It predicts an almost 7 percent advance to 4.1 per euro by year-end, while saying that local politics are a risk to its outlook.

Poland’s economy “is one of the strongest in Europe and I expect that to hold in 2016,” said Anders Svendsen, an economist at Nordea in Copenhagen. Yet “things are going in the wrong direction in Poland in terms of the whole political climate. Some foreign investors will look elsewhere.”