Funds look to rate cuts for market boost
With the Monetary Policy Council (RPP) scheduled to define its 2002 inflation targets later this month, investment fund managers are hoping for substantial interest rate cuts to help them grab a greater share of the savings market.
Poland's high interest rates mean that people often only have to go to their local bank to get a good return on their savings. Although this makes saving easier for consumers, for investment funds high interest rates hurt business.
"We're approaching a period of growth," according to Dorota Winczewska, chairman of ING BSK Investment Funds. "But because bank interest rates are very high, customers can get a high real rate of interest even on a one-month deposit account, so there still isn't a substantial influx of money into investment funds."
Although investment funds in Poland have seen an increase in assets to zl. 6.6 billion ($1.5 billion) in 2000 from zl. 3.1 billion ($795 million) in 1999 their share of the savings market has remained small at about 2%, or 1.1% of gross domestic product (GDP), Winczewska said. "In (Western) Europe this is very different: 20% in France, over 20% in Italy, over 10% in Germany and around 15% in Great Britain," she said.
The investment fund market has 16 companies in Poland, with the top four Skarbiec, Pioneer, DWS and ING holding more than 75% of the market, according to Jan Mieczkowski, a DWS board member. Nevertheless, it's a market that is still short on profit. "The whole investment fund sector lost around zl. 38 million ($8.6 million) in 2000," he said.
But Winczewska said this should reverse with a sizeable reduction in the base interest rate in the next 18 months. "As soon as interest rates fall next year investment in different financial instruments will become a lot more attractive," Winczewska said. "Customers will start to look for investments that can bring them a lot more than a normal bank deposit account." She said the time had come for a change in Poland's fiscal policy.
"This year the Monetary Policy Council will closely examine the budget of the new government," Winczewska said. "At the start of next year this observation phase will continue, so we can talk of a more dynamic reduction in interest rates toward the end of next year.
"A level of three points above inflation will be a level at which customers would start to look for other means of investment."
Closing the gap between the interest rate and the rate of inflation is the key to drawing clients away from banks. Mieczkowski said this will be hugely important for market growth when the difference between the rate of inflation and the interest rate is no greater than 1.5%. "But a difference of 3-3.5% will still be a great success for the Polish economy and I think this is attainable within two years," she said.
According to Andrzej Dorosz, chairman of the Skarbiec investment fund, other factors also determine changes in the capital market. "A fall in interest rates is usually positively linked with a growing demand for shares, anticipating an improvement in the financial condition of companies and growth in global demand, which is a precursor to an improvement in the economic condition of the country," Dorosz said. "I think we can expect these to appear in late autumn, toward the turn of the year."
He said an immediate increase in public interest in funds is unlikely and eventual market growth will be restricted to low-risk investment funds, which make up 60% of the Polish market. "There is a delay during which investors wait for the formation of trends," he said. "When clear trends emerge there will be growth in interest in certain instruments. The investment fund market in Poland will continue to develop through an influx of assets into money market and bond funds."
Since the RPP made stabilizing prices the primary goal of its interest rate policy, the support of economic development has taken a secondary role, Mieczkowski said. He added that falling inflation and slower growth in GDP justify interest rate cuts. "I think the aim that the NBP (National Bank of Poland) has set itself is justified and attaining a natural level of inflation will take place in the next two years in 2003 we will be closer to 3%," Mieczkowski said, adding that there would still be room for a reduction to lower levels. "If we theoretically accept a certain level of inflation as a natural element of growth, it can not be higher than 1.5-2%, so our 6% is still too high.
"It carries the risk of destabilizing the relation between domestically made products, the ability to export and the need to import."
