Poland's capricious currency

By bne IntelliNews March 16, 2010

Jan Cienski in Warsaw -

Ever since the economic crisis, Poland's zloty has undergone some of the most violent swings of any Central European currency - and the wild ride is not likely to end anytime soon, according to the prime minister's new economic advisory council.

"For businesses it is crucial that we implant mechanisms which will ensure the stability of the zloty," says Malgorzata Starczewska-Krzysztoszek, chief economist for Lewiatan, the Polish employers federation, and a member of the new council. "From the point of view of the economy and companies, there is nothing worse than currency fluctuation; it makes it difficult to plan and lead a business."

That is exactly the view of Mateusz Figaszewski, spokesman for Solaris, a bus maker in central Poland which had a fairly good downturn, actually increasing its sales in 2009 over 2008, mostly on the strength of continued spending by municipalities and regional governments across Europe. "These swings create big problems for our planning," he says, noting that the company does have some insulation from currency fluctuations because about a third of its 1,114 buses are sold in Poland, while two-thirds are exported.

But for Solaris the best answer would be Poland's rapid entry into the Eurozone. Yet there is little chance of that happening before 2015, with the government only planning on dropping to below the budget deficit ceiling of 3% of GDP mandated by the Maastricht criteria for euro entry by 2012 or 2013.

Back up again

In the meantime, the zloty's unpredictability will likely continue. Before the collapse of Lehman Brothers on September 15, 2008, the zloty had been on a strengthening trend - reaching 3.36 to the euro on the day the investment bank went bankrupt.

As the crisis gathered strength, and worries rose about the stability of all of Central Europe, the zloty was one of the worst affected currencies, mainly because the zloty market is the largest and most liquid in the region, making it easy for investors spooked about the situation in Ukraine or the Baltics to use the zloty as a proxy and flee Central Europe. At its nadir, in February 2009, the zloty reached 4.9 to the euro, a level which left thousands of foreign currency mortgage holders deep under water, and threatened to derail the public finances, as much of Poland's debt is denominated in euros.

However, at that level it did provide a boost to exporters like Leszek Waliszewski, owner of FA Krosno, a car parts maker in eastern Poland, who says the softer zloty helped him survive the crisis by making him more competitive. "Despite the crisis, we were still profitable," he says.

However, Waliszeski wants the zloty to stay weak: "I won't be happy if it falls below 4 to the euro," he says.

So he's certainly less happy now, as the zloty in recent days seems to have decisively broken through the barrier of 4 to the euro, dropping to 3.86 to the euro in the weeks of March. Although forex mortgage holders are no doubt greeting the currency's swift strengthening with relief, it is raising alarm bells among policymakers. "A fundamental danger to economic growth is a too-fast appreciation of the zloty," warns Andrzej Rzonca, a member of the central bank's interest rate setting Monetary Policy Council. "The zloty should not strengthen faster than called for by its fundamentals, and no faster than the other currencies of the region... At the moment a forecast of 3% GDP growth is not overly optimistic, but the strengthening of the zloty could force a downward revision."

A big reason for the zloty's recent strong performance is the country's outstanding economic performance last year. Poland was the only EU country not to fall into recession last year, recording growth of 1.7%, and for this year it looks on track to hit 3%, one of the fastest rates of GDP growth in the EU.

The problems of Greece and the other troubled Eurozone economies have made investing in Western European countries a riskier proposition than in the past. In response, emerging Europe has become a more attractive play. "The high-quality CEE countries like Poland and the Czech Republic look significantly more attractive than Greece, Spain and Portugal," reckons Lars Christensen, emerging markets economist with Danske Bank.

The change in sentiment towards the region has been noticed by Dominik Radziwill, Poland's deputy finance minister, who has had a very easy time placing Polish debt on international markets. "We are seen as a safe haven," he says. "We are an alternative for investors for investors who are looking at the periphery of Europe. In one sense, we're a beneficiary of this turmoil. Generally, Poland is seen very positively. Interest rates are higher here than in the Eurozone, and there is a belief that the zloty will continue to strengthen."

That's unlikely to make Waliszewski and thousands of other Polish exporters particularly optimistic about the near future, though.

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