Polish Economic Power to Limit Zloty Pain as Protests Endure

  • Zloty to stay weak after biggest drop since November on Friday
  • Markets await president’s court-revamp decision, EU reaction

Anti-government protests, now into a second week, and the European Union’s plans to move toward sanctioning Poland are set to weigh over the country’s financial markets. Yet while the short-term outlook for the zloty currency is bearish, there’s little panic.

The zloty was little changed on Monday at 4.2666 per euro, having suffered its worst day this year on Friday with a 1.3 percent tumble. The fall came as newspapers and websites splashed front pages with news of Poland’s judicial reforms, which the EU and the U.S. say undermine the independence of courts and endanger democratic rule. While the negative headlines kept coming over the weekend and more are expected in the days to come, zloty investors will find some solace in Poland’s robust economy and budget, according to Peter Attard Montalto from Nomura International.

“We will see further volatility and under-performance versus the region but not anything more meaningful in size,” Montalto, the bank’s chief economist for emerging Europe, the Middle-East and Africa, said Sunday by email. “The current situation in Poland is not a big scare for portfolio investors who see strong growth and decent fiscal situation as key.”

Tens of thousands of opposition-backed demonstrators in more than 100 cities staged protests over the weekend, urging President Andrzej Duda to veto legislation giving the nation’s ruling party extensive control over the judiciary. It’s unclear when the head of state will decide regarding the three judiciary overhauls passed this month by his former party, Law & Justice. Duda will make a statement at 10 a.m. on Monday in Warsaw.

Protesters marched peacefully Sunday, holding flags and constitution booklets in their hands. The battle over changes to the courts is becoming the country’s biggest political standoff since communism fell in 1989, turning the right-wing government against its partners in western Europe and the U.S. The reform is “one step back for democracy,” Senator John McCain tweeted Saturday.

  • The zloty sank to 4.2667 per euro on Friday, the lowest level since April
  • The yield on Poland’s 10-year bonds fell three basis points last week to 3.29 percent
  • Warsaw’s WIG20 stock index declined 0.3 percent last week

Heightened Volatility

Poland’s currency is backed by an economy that expanded an annual 4 percent in the first quarter. The European Commission sees the budget deficit reaching 2.9 percent of economic output in 2017 and 2018.

The zloty, one of this year’s best-performing currencies, began to slide after Frans Timmermans, the EU commission’s principal vice president, said Wednesday that the bloc’s executive was near recommending a procedure that could pave the way for Poland to lose its voting rights in the 28-nation bloc. This is considered a “nuclear option” for the EU in dealing with authoritarian national behavior.

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“I expect a weaker zloty in the coming days, with volatility at heightened levels,” Jaroslaw Janecki, chief economist at Societe Generale SA in Warsaw, said by phone. “If the president signs the court changes, we’ll probably face greater protests, which will feed into higher uncertainty on the markets.”

Seasoned Investors

Fitch Ratings, which ranks Poland at A-, the fourth-lowest investment grade, said last week that political “noise” could impact investor sentiment, while S&P Global Ratings said the legislative changes may hurt longer-term growth prospects for the $470 billion economy.

But for seasoned emerging-market investors, who deal with daily political upheaval from Turkey to Brazil, the Polish judicial revamp won’t move the dial by much, according to Piotr Kalisz, chief economist at Bank Handlowy SA.

“Most emerging-market investors look at such changes with calm,” Kalisz said. “We have a series of very good economic data, which encourage investment in Polish assets. So these two factors -- the political and the economic -- should balance themselves out.”

— With assistance by Dorota Bartyzel

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