Market shrugs off announcement of zloty free float
The financial market took the Monetary Policy Council's (RPP) decision to free float the zloty rather calmly last week. Although the currency initially bounced around on the somewhat unexpected news, it remained stable and traded for the most part around the level seen prior to the RPP's move.
The zloty rose sharply Tuesday on the announcement that its 0.3% crawling peg and 30-point trading band were being abandoned, but receded as a result of investor uncertainty and profit taking, going from its pre-announcement level of 4.15 to 4.08 before sliding down to 4.13 during the same session. The zloty opened at 4.17 to the U.S. dollar on Thursday, but on Friday, reflecting a drop in New York's Nasdaq exchange, it opened at 4.18 and closed at 4.17.
"When you remove the band, then everything can happen, but we don't expect to have a currency crisis in Poland," said Zbigniew Chmielewski, a treasurer at ING Barings.
Analysts said the RPP's government-sanctioned decision shows its confidence in the currency. The scrapping of the 0.3% monthly devaluation of the zloty should attract bond traders, they said.
But the reasoning behind the currency's flotation lies elsewhere.
"It's really an element to help the National Bank of Poland (NBP) to fight inflation," noted Dariusz Filar, chief economist at Bank Pekao, echoing the central bank's statements about its intentions during the free-float announcement.
No longer obligated to safeguard the zloty, the central bank can shift focus to its fight against inflation which hit an annual rate of 10.4% in February and leave the zloty to compete on its own merit in the marketplace, he said. However, this doesn't mean the central bank is entirely out of the process since it has reserved the right to intervene in the currency's valuation.
For the time being, though, analysts are expecting only nominal volatility for the zloty and slight economic ramifications as the market decides what the national currency is worth.
"I think that in the near future everybody will play as in the previous regime," said Marcin Mroz, an economist with brokerage Wood and Co. "I think the zloty will be the same."
In the medium term, however, the zloty's newfound freedom of movement might be put to the test as this year's privatization revenue begins to flood the market and macroeconomic factors begin pushing and pulling on the economy, he said. Until then, it should be relatively smooth sailing, Mroz said.
"At this point in time, it is as much a theoretical change as a practical one, but it may be fully utilized when volatility increases and strong appreciations and depreciations occur in the economy," he said.
Pekao's Filar agrees. The zloty was essentially already trading freely before the full flotation, he said, considering its trading band extended to plus or minus 15% on either side of the central parity rate. Until Wednesday, the parity rate was fixed daily by the central bank and set against a euro/U.S. dollar currency basket.
"On the high side above parity, it was never more than 10%," Filar said. "The band was never fully used. There was always the reserve on both sides. From this point of view, it's not surprising that the zloty's remaining relatively stable."
On the low side, he added, the zloty never dipped further than 5% below parity, as it did in October 1999.
Analysts are not expecting the freed-up zloty to have much of an effect on actual inflation figures. Filar said Pekao is looking for March inflation figures to show 0.7% growth from February and an annual 10.2% rate a slight decrease from February's annual rate because of lower oil and foodstuff prices. Wood and Co. sticks by its estimate of 7.5% year-end inflation for 2000, Mroz said.
The worrisome account deficit, however, could pose a few problems. Especially, Mroz added, if it hits 8% of gross domestic product (GDP) and "if investors become scared and start to withdraw." The deficit currently stands at 7.8% of GDP.
Though a strong zloty is generally considered to widen the account gap by adding to Poles' purchasing power when buying imports, Filar said positive export figures in the last few months are just as significant.
The central bank, for its part, is counting on the currency's liberalization to ease upward pressure on its value over the long term and thus help balance the account.
Poland has been experimenting with a free-currency market since March 1989 when it opened its economy and fixed the zloty at 9,500 to the U.S. dollar. In 1991, the zloty was set against a basket of five currencies.
The crawling-peg monthly devaluation regime was introduced in 1991. After a series of inflation-compensating adjustments throughout the decade, in which the crawling peg decreased along with inflation, the central parity rate was introduced in March 1995. Just prior to that, the zloty was denominated from zl. 24,000 to zl. 2.4 to the dollar.
The trading band of +/- 15% from parity and the 0.3% crawling peg used until last Wednesday were introduced in March 1999.
Analysts said the unleashed zloty should now have an easier time finding its way to equilibrium with the euro before Poland eventually adopts the Euroland currency.
