Political infighting takes toll on zloty
A growing impression of political instability in Poland caused the zloty to dive to 4.86% below parity last Thursday, an all-time low.
While concerns of the current account deficit and inflation had weakened the zloty for the past month, last week's decline was partly the result of infighting in the governing Solidarity Election Action (AWS) and Freedom Union (UW) coalition over tax reform. Finance Minister Leszek had threatened to walk out of the government over the issue, which caused skittishness among foreign investors who see Balcerowicz as the caretaker of fiscal discipline.
"What we have are the results of the immaturity of politicians," said Jaroslaw Malkowski, deputy president at LG Petrobank. "With macroeconomic data so far from being bright, the ruling coalition should do everything to calm investors down. In this case, we saw something completely opposite."
The parties had hammered out a tax compromise by Friday, and Parliament's Finance Committee is expected to move the bill to Parliament today. A full parliamentary vote is expected next week.
The zloty strengthened on that news Friday, closing at 3.32% below parity. Tied to a basket of currencies, the zloty is allowed to trade in a band of +/- 15%.
Economists last week said that the political upheaval could continue, however, as the government is now pressed to pass the tax bill and have President Aleksander Kwasniewski sign it by the end of November.
"The whole situation worries me the most," said Krzysztof Rybinski, chief economist with ING Barings. "It undermines macroeconomic policy and can have long-term consequences."
But political quibbling was not the only factor in the zloty's poor performance last week. Current account deficit figures released last week were also weak. The current account deficit stood at $1.12 billion in September, up significantly from $786 million in August. That brings the total deficit for January to September to $7.96 billion, the National Bank of Poland (NBP) said. The central bank also said the trade deficit amounted to $1.28 billion in September, against August's $1.23 billion. That brings the trade shortfall for the first nine months of 1999 to $10.02 billion.
According to balance of payments data, Polish exports shrank 13.3% in the January-September period to $19.54 billion against the same period last year and imports fell by 7.5% to $29.56 billion. In the month of September, exports amounted to $2.08 billion, against $2.34 billion in September 1998. Imports also shrank for September to $3.36 billion, down from $3.87 billion for the same period the year before.
While October inflation data will be released on Nov. 15, the Central Statistical Office (GUS) has already announced that food and non-alcoholic beverage prices rose 0.6% during the first half of October, after rising 1.4% in the previous 15 days and were 2.1% higher than during the second half of September.
"We expect that inflation for October will be 8.3-8.5%, year-on-year," said Katarzyna Zajdel, analyst with Citibank (Poland). The NBP's inflation target for this year was 6.6-7.8%.
