Currency Summary
By Marek Zuber
The past...
The last twelve months can hardly be considered to have been a calm period for the zloty. The zloty's quote against both the euro and the dollar has been highly volatile. There were three main factors behind these fluctuations. First of all, there has been a distinct deterioration in the perception of public finances, mainly due to the prolonged preparation of the government's rescue plan. Concerned investors started selling the zloty, which depreciated its actual value. Secondly, the political situation has exacerbated the matter at the same time. A lack of political stability in developed countries does not greatly affect currency rates, but when you add to it deteriorating public finances and increasing support for populist parties, the sell-off starts. The third factor which has had a huge impact on the market is the EUR/USD pair. Throughout the year, the zloty has been depreciating against the euro, reaching a max of 4.94 in February. The USD/PLN pair has been very choppy, but without an up or down trend.
Złoty in the chains of politicians
If the political situation becomes more stable within the next twelve months, the Polish currency should appreciate. Unfortunately, it seems that the political issues will draw the most attention.
There are a few factors that may appreciate the zloty in the upcoming months. First of all, Poland's entry into the EU means a lower investment risk. This applies to both portfolio and direct investments. As far as portfolio investments are concerned, we expect wider interest from investors avoiding high-risk exposure, e.g. pension funds. Furthermore, Poland may attract small and medium-sized companies, which often have trouble measuring and identifying risks and which have not been active on the Polish market thus far. The investment inflow will cause higher demand for our currency, resulting in the zloty's appreciation.
Secondly, after May 1, we will profit from EU funds, as they will be converted primarily into zlotys. Of course, the extent of this process will be dependent on our ability to absorb the funds (which is hard to predict at the moment). It should be stressed that the granting of this money does not mean that it will be wired immediately, as the process will take time.
Thirdly, we expect next month to see good macroeconomic data again. In my opinion, it is possible that GDP will rise above 5.5 percent in 2004, which would obviously improve the perception of Poland and boost the investment interest in domestic assets. If the economy expands dynamically, we can expect a widening of the current account deficit, but it should not be significant.
It should be stressed that neither the economic foundations nor EU accession will be, in my opinion, the most important events affecting the Polish currency. It seems that political issues will be key, especially the prospects of implementing the public finance rescue plan. The market forecasts will be hugely dependent on political scenarios. If a government is created, backed by a stable majority ensuring implementation of reform, the zloty will gain in value. A similar situation will occur if, in the case of early general elections, reformative parties come to power (e.g. a coalition of the Civic Platform and Law and Justice). In contrast, if the reforms are blocked, or if the populists win in earlier-than-scheduled elections, we may witness a dramatic capital outflow from Poland, and the zloty's depreciation by increments of ten percent.
In my opinion, the political situation will be rather beneficial for the zloty (given a stable government or reformative parties winning a general election), so I assume at least an eight to ten percent appreciation of the zloty over the next twelve months. This does not mean, nevertheless, that the process will be uninterrupted. For example, a decision to hold earlier elections could lead to short-term volatility on the market.
- provided by Treasury Management Systems.
www.tms.pl
The past...
The last twelve months can hardly be considered to have been a calm period for the zloty. The zloty's quote against both the euro and the dollar has been highly volatile. There were three main factors behind these fluctuations. First of all, there has been a distinct deterioration in the perception of public finances, mainly due to the prolonged preparation of the government's rescue plan. Concerned investors started selling the zloty, which depreciated its actual value. Secondly, the political situation has exacerbated the matter at the same time. A lack of political stability in developed countries does not greatly affect currency rates, but when you add to it deteriorating public finances and increasing support for populist parties, the sell-off starts. The third factor which has had a huge impact on the market is the EUR/USD pair. Throughout the year, the zloty has been depreciating against the euro, reaching a max of 4.94 in February. The USD/PLN pair has been very choppy, but without an up or down trend.
Złoty in the chains of politicians
If the political situation becomes more stable within the next twelve months, the Polish currency should appreciate. Unfortunately, it seems that the political issues will draw the most attention.
There are a few factors that may appreciate the zloty in the upcoming months. First of all, Poland's entry into the EU means a lower investment risk. This applies to both portfolio and direct investments. As far as portfolio investments are concerned, we expect wider interest from investors avoiding high-risk exposure, e.g. pension funds. Furthermore, Poland may attract small and medium-sized companies, which often have trouble measuring and identifying risks and which have not been active on the Polish market thus far. The investment inflow will cause higher demand for our currency, resulting in the zloty's appreciation.
Secondly, after May 1, we will profit from EU funds, as they will be converted primarily into zlotys. Of course, the extent of this process will be dependent on our ability to absorb the funds (which is hard to predict at the moment). It should be stressed that the granting of this money does not mean that it will be wired immediately, as the process will take time.
Thirdly, we expect next month to see good macroeconomic data again. In my opinion, it is possible that GDP will rise above 5.5 percent in 2004, which would obviously improve the perception of Poland and boost the investment interest in domestic assets. If the economy expands dynamically, we can expect a widening of the current account deficit, but it should not be significant.
It should be stressed that neither the economic foundations nor EU accession will be, in my opinion, the most important events affecting the Polish currency. It seems that political issues will be key, especially the prospects of implementing the public finance rescue plan. The market forecasts will be hugely dependent on political scenarios. If a government is created, backed by a stable majority ensuring implementation of reform, the zloty will gain in value. A similar situation will occur if, in the case of early general elections, reformative parties come to power (e.g. a coalition of the Civic Platform and Law and Justice). In contrast, if the reforms are blocked, or if the populists win in earlier-than-scheduled elections, we may witness a dramatic capital outflow from Poland, and the zloty's depreciation by increments of ten percent.
In my opinion, the political situation will be rather beneficial for the zloty (given a stable government or reformative parties winning a general election), so I assume at least an eight to ten percent appreciation of the zloty over the next twelve months. This does not mean, nevertheless, that the process will be uninterrupted. For example, a decision to hold earlier elections could lead to short-term volatility on the market.
- provided by Treasury Management Systems.
www.tms.pl
