Calmer month ahead for zloty
The months of turmoil for the zloty have come to an end and the currency should remain stable for the remainder of the year, fluctuating between +/- 1% of parity, analysts said last week.
"Any weakening won't be very deep and the current levels are very probable to the end of the year," said Mariusz Pypec, an analyst at CA IB Securities.
Last week's pledge by Finance Minister Leszek Balcerowicz that he would not resign has ended weeks of instability for the zloty. The currency had weakened steadily in the past two weeks as Balcerowicz threatened to quit if the government could not pass a series of proposed personal and corporate tax cuts. While President Aleksander Kwasniewski vetoed changes to personal taxes, corporate cuts did go through.
That issue was only one of a series of setbacks for the zloty in 1999. Negative macroeconomic reports throughout the year also hit the currency, along with a rising current account deficit, which is on target to reach $11 billion by year's end. But analysts last week said the last month of 1999 had few punches left to throw at the zloty, although Pypec warned that Y2K worries may cause some investors to take profit in the coming weeks. Poland is considered to be particularly vulnerable to the Y2K bug, which could shut down computers and cause havoc with things such as electricity supply and telephone lines.
While the zloty kicked off 1999 at zl. 3.45 against the dollar, the year-end exchange rate is expected to run around zl. 4.271, Pypec said. The Finance Ministry updated its average rate for 2000 to zl. 4.04 last Wednesday and at the time of writing Friday, the zloty stood at 4.2680.
The zloty lost 0.6% on Monday, weakening to 2.5% below parity, the day after Kwasniewski vetoed changes to personal income taxes. The zloty had sunk to nearly 6% below parity earlier in the month, when Balcerowicz threatened to resign, according to Citibank (Poland)'s daily economic report. The zloty opened last Tuesday stronger at 1.54-1.65% below parity, but strengthened to 0.5% below parity after Balcerowicz announced he was staying in the government. The zloty opened Friday stronger at 0.16-0.24% above parity.
The zloty can fluctuate in a band of 15% plus or minus parity, the rate set daily by the National Bank of Poland (NBP). The NBP sets the zloty against a basket of currencies of which the dollar comprises 45% and the euro 55%. The parity rate is now gradually devalued at a pace of 0.3% per month to neutralize Poland's inflation, but the central bank is discussing doing away with the crawling peg.
The other big event last week was news on Wednesday that the current account deficit is expected to come in at $8.8 billion in the first 10 months of the year and will account for 6.8% of gross domestic product (GDP). Exports were up 10% in October over September, according to the NBP. However, for the first 10 months of this year, exports were down 13.2% and imports decreased by just 8.2%, Citibank (Poland) said.
And while the zloty should have rebounded on the positive export news, it actually moved little, opening Thursday at 0.5-0.87% below parity. Krzysztof Bledowski, chief strategist at brokerage house Wood & Co, said the lack of movement was not surprising, as the zloty has reacted strongly to bad news as of late, but showed little interest in any positive announcements.
Inherent in the zloty's shakiness this year is the fact that foreign investors have been a little spooked by Poland, he said. "Poland remains one of the weakest countries in the region in terms of money coming back," he said.
He pointed out that net inflows from foreigners into equities have cooled in recent months, and that this year's negative macroeconomic picture has diminished investors' appetites. He said that investors have been pulling away from the treasury market and as a result yields of monthly T-bills have risen consistently.
To improve the zloty's position, Bledowski said, the government needs to tighten fiscal and monetary policy. The current situation, with a widening budget deficit which is expected to reach 2.3% of gross domestic product (GDP) in 2000 and a high expected year-end current account deficit of $11 billion, does not bode well for the currency in the longer term.
"For a foreign investor, it's not an environment where you would be rushing in with a gung-ho attitude," he said.
In the mid-term, the NBP will not want to see the zloty strengthen significantly, preferring instead to see the currency trading at close to parity, Pypec said. The NBP is more concerned about keeping inflation under control, which means cooling consumption and a weaker zloty will help that aim.
