Zloty Lags Emerging-Market Peers as Brexit ‘Proxy’ Status Weighs

  • Polish currency heads for worst weekly decline in six
  • Country is vlunerable to subsidy curbs, political risks

Poland’s zloty is heading for its worst week in six after the emerging-market “proxy” currency for investors betting on Brexit was hit by opinion polls showing a rising probability of the U.K. voting to leave the European Union next week.

The zloty fell 0.2 percent to 4.4380 per euro at 3:30 p.m. in Warsaw, extending its weekly drop to 1.4 percent, the third-biggest among 24 developing-economy currencies tracked by Bloomberg. Long regarded as a regional “haven,” the Polish currency has underperformed East European peers this year as the country’s new government spooked investors with the EU’s highest tax on banks and ongoing battles with European partners, who accuse Poland of backsliding on democratic standards.

Poland, the EU’s biggest post-communist economy, is vulnerable because a U.K. exit may curb the subsidies Warsaw receives from the bloc’s common budget and erect barriers to $18 billion per year in bilateral trade. The political fallout of Brexit may be even bigger, according to Erste Bank Group AG, which said the vote may question “the existence of the EU as a whole” and lead to a weakening of countries that haven’t adopted the euro.

“Weaker global risk appetite and Brexit fears have hit the zloty relatively hard compared to its peers,” said Per Hammarlund, the chief emerging-market strategist at SEB SA in Stockholm. “Poland is going through a political transition period, making Polish markets particularly vulnerable to changes in investor sentiment.”

Base Case

The zloty, east Europe’s most-liquid currency and gateway to the nation’s $233 billion government debt market, has weakened 4.2 percent against the euro this year, lagging all emerging-market currencies besides the Indian rupee, Chinese renminbi and the Argentine and Mexican pesos, according to data compiled by Bloomberg.

Bookmakers’ odds, which this week indicated a growing probability of the “Leave” side winning the U.K. referendum, showed a reduced chance the U.K. will leave the EU following the murder the day before of Labour Party representative Jo Cox, a campaigner for Britain to remain in the 28-member bloc. Still, the zloty traded near four-month lows against the euro.

“Among central and eastern European currencies, the zloty has been seen as the closest proxy when betting on the U.K. referendum,” Vladimir Miklashevsky, a senior strategist at Danske Bank A/S in Helsinki, said by e-mail on Friday. In Danske’s base-case scenario, which has the U.K. remaining in the EU, the zloty is forecast to strengthen to 4.33 per euro in three months and to 4.22 in 12 months, he said.

‘Digestible’ Impact

Britain is the third-largest contributor to the EU budget, with a net contribution of 10.9 billion euros ($12.4 billion) in 2015, while Poland is set to be the biggest recipient among the bloc’s 28 members through 2020. It’s unclear, however, how quickly Britain could negotiate a way out of the block and pull its funds from the common budget.

Poland has fewer trade links with the U.K. than some euro-area nations, with exports amounting to less than 3 percent of its gross domestic product, compared with more than 6 percent for Ireland, Belgium and the Netherlands, according to data compiled by Bloomberg. While Brexit’s fallout on east European exports would probably be “digestible,” politics “might be the most difficult impact to handle,” Erste Bank analysts, led by Henning Esskuchen, said in a research note this week.

“Brexit could question the irreversibility of the economic and political integration of central and east European countries within the EU,” Erste said. A vote to leave the block may “increase the divide” between the EU’s core euro-area members and those with their own currencies, such as Poland, it said.

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