Back in business
By : Jeffrey Sparshott
Moment of silence: The New York Stock Exchange reopens.
Markets in Poland and around the world are expected to remain volatile as economic and political uncertainty keeps investors uneasy and looking to Wall Street for economic and Washington for political signals, analysts and economists said last week.
While Polands stock market is directly influenced by global sentiment, Polands economy could avoid the immediate fallout of terrorist attacks on the United States, economists said. But the country, already experiencing some of the lowest growth rates in years, relies on Western Europe as its main market for exports; if those economies start to suffer and weak Polish domestic demand stays the same, companies based here could suffer.
Everything now is just speculation and its very hard to assess what will happen in the near future, said Ivan Fabijancic, an economist with Erste Bank in Vienna. But in general my opinion is that whatever happens, the Central and Eastern European region will be less affected than the other emerging markets.
Still, all eyes remain on the United States and world economies, which were sluggish before the terrorist strikes on the World Trade Center and the Pentagon, and which many fear could suffer from undermined consumer confidence and panicky stock sell-offs.
U.S. stocks slid sharply last week. The U.S. Dow Jones Industrial Average (http://www.djindexes.com/jsp/industrialaverages.jsp?sidemenu=true) suffered its largest single-day point loss Monday, the first day of trading in New York since the Sept. 11 attacks. As of Thursdays close it had fallen 12.8% for the week; the tech-heavy Nasdaq Composite Index (http://www.nasdaq.com) was down 13.2%.
The Warsaw Stock Exchange (WSE) (http://www.gk-kety.com.pl/index_ang.html) was erratic in light trading, striking a 34-month low early last week but recovering slightly. Since Sept. 11, the markets blue chip WIG20 index has lost 8.8%, closing Thursday at 1,045.98 points.
Throughout the week we had some ups and down more downs than ups, said Artur Szeski, director of research for CDM Pekao Securities. It seemed for a moment that the U.S. would calm down but it seems the opposite is now true. For Poland, much depends on the political scene and the U.S. response to the attacks.
Copper and telecoms conglomerate KGHM Polska Mied (http://www.kghm.pl) had an especially tough week, with its share price falling 13.4% to zł. 12.25. The heavily traded stock has been hurt by fears that current turmoil will cause the złoty to strengthen compared with the dollar, damaging the companys competitiveness on export markets, analysts said. The złoty was fairly stable to the dollar last week.
A coordinated effort by central banks early last week to bolster the re-opened U.S. stock markets and support the economy appeared to come up short, though the New York Stock Exchange and Nasdaq, the two biggest exchanges in the world, did not fall as far and fast as some analysts feared.
The U.S. Federal Reserve, the European Central Bank, the Bank of Canada, the Swiss National Bank, the Bank of Japan, the Bank of England and several other central banks lowered interest rates Monday and Tuesday.
Even before the tragic events of (Sept. 11), employment, production, and business spending remained weak, and (those) events have the potential to damp spending further, the Fed said in explaining its 25 basis point rate cut. Nonetheless, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate.
Polands Monetary Policy Council (RPP) (http://www.nbp.pl) appeared to lean away from following the international trend during its monthly meeting this week. I believe that what happened in the U.S. doesnt mean we will follow the same way, said Grzegorz Wójtowicz, one of 10 RPP members. We should take into consideration specific fiscal policy and take into consideration political and economic risk in Poland.
The RPP will watch the domestic and international economic situation unfold, but the council needs more information especially about the countrys budget and a still unsolved crisis-level deficit before it can move ahead, he suggested.
To some extent it will be necessary to analyze possible political and economic consequences of the situation, Wójtowicz said. But there are very many question marks. One of those is the 2002 Polish budget, which in a worst-case scenario faces a zł. 88 billion ($20.9 billion) deficit, equal to 11% of gross domestic profit (GDP).
Last weeks unsurprising announcement that Marek Belka will be Polands next finance minister and deputy prime minister, followed by Belkas market-friendly budget outline, was a brief fillip for investors, said Tomasz Bardziłowski, Poland country analyst for Credit Suisse First Boston. But the Sept. 23 elections, in which the ex-communist Democratic Left Alliance (SLD) was expected to win, are likely to have very limited influence on investors, he said.
The main driving forces are the international events, Bardziłowski said. Investors are on the sidelines awaiting developments on the international markets, waiting to see how markets will react to the conflict.
Belka last week said he would first look to stabilize the budget and then spark economic growth. Part of his plan includes tipping some of next years planned deficit spending to this year, significant spending cuts and tax hikes. The savings and new revenue would allow a budget deficit no greater than zł. 40 billion ($9.5 billion), about 5% of GDP, he said.
Another big question mark is the U.S. economys performance. A declining U.S. economy would directly affect the European Union (EU) and a declining EU economy, which buys more than 70% of Polands exports, would directly affect Poland.
This year the domestic demand was very low but in some sense was offset by exports, said Dariusz Filar, chief economist for Bank Pekao. Unfortunately if the world is going into recession, first the U.S. and then Europe, it will have a negative impact on Polish exports. At least it limits the possibility of further growth.
Even if lower interest rates spur domestic demand, it will be difficult to offset any significant losses to export markets, Filar said. At the end of August, exports were up by 9.4% compared to the same period in 2000, according to the Central Statistical Office (GUS) (http://www.stat.gov.pl/english/index.htm). With that outlet uncertain, the forecast for Poland is not promising.
We expect the next year to a great extent to be a repetition of this year: rather low growth, no visible rebound, probably stabilization of inflation, Filar said.
GDP figures released by GUS on Friday showed that Polands economy grew only 0.9% in the second quarter of the year, compared with 2.3% during the same period in 2000. Domestic demand fell 1.2% year on year during the three-month period ending with June; there was a 1.4% decline in the previous three-month span.
GDP is up 1.6% for the first half of the year. The government projects year-end growth from 2.0-2.5%. The only joy we can probably take from those figures is that maybe things are not as bad as we originally thought they were, said Jarosław Deryło, a research fellow with the Adam Smith Research Center. But they do not take into consideration the events of Sept. 11.
Deryło cautioned against overestimating the impact of the international situation. I question the notion that all the commotion on the markets understandable commotion needs to translate into something substantially more than short-term economic hardship, he said. It need not be equated with a longer-term recession.
