Poland’s new president gives investors the shudders

By bne IntelliNews May 26, 2015

bne IntelliNews -

 

A weakening zloty, falling bank stocks and rising bond yields welcomed Andrzej Duda to the Polish presidency on May 26 as investors fretted that more populist policy could disrupt fiscal discipline and hurt lenders.

Duda from the opposition Law and Justice (PiS) party gained 51.55% of the vote, leaving incumbent Bronislaw Komorowski – supported by the ruling Civic Platform (PO) – behind on 48.45%. Duda’s rise to the presidency has been largely a surprise. He was virtually unknown to the wider public when PiS picked him to run in late 2014, and his standing in the polls started off below 10%.

However, Duda consistently pressed a populist, conservative message to attract support. He has spoken of increasing budget spending, taxing bank assets, converting Swiss franc mortgages to zloty at historical rates, and even reducing foreign ownership in the bank sector, which currently sits at around 70%. The PiS candidate has also hinted he would like to cancel PO’s recent hike in the retirement age.

On top of that, the presidential vote is a forerunner to parliamentary elections in the autumn. Facing a tightened race against PiS, the PO government is clearly expected to woo voters, while the possibility of a PiS government after October has set hearts racing in the markets.

The zloty began falling on the election night itself as Duda pressed home his advantage, with the Polish currency dropping nearly 1% late on May 24 to hit PLN4.13 per euro. The currency has since stabilised, but longer term it has weakened 1.5% since Duda won the first-round vote on May 10, making it the fourth-worst performer among 24 emerging market currencies tracked by Bloomberg.

Bank stocks led falls on the Warsaw Stock Exchange on May 25. Shares of the country's biggest lender PKO BP fell 4.6%, while Bank Millennium dipped 4.1% and Getin Noble Bank 3.9%. It was no surprise that it was those with the largest portfolios of Swiss franc-denominated mortgages that led the falls. The government is now under pressure to force lenders to take more of the financial pain that stems from January's spike in the value of the Swiss currency. 

Yields on 10-year Polish bonds rose to almost 2.9%, their highest in ten days. Yields on the country's two-year notes climbed to a two-week peak of just over 1.86%.

“While Duda’s term in office will only start in August, the president-elect will likely submit bills addressing his campaign promises to the parliament in the meantime," Otilia Dhand at Teneo Intelligence points out. "While the current PO-PSL majority in parliament would likely reject such bills, these measures would make a popular campaigning strategy for PiS.” 

However, even should PO stave off the PiS challenge in the parliament, it will be forced to deal with Duda and the presidential veto. That will push more populist policy come what may, as well as increase the risk of political instability – none of which will cheer investors.

However, some analysts are looking on the brighter side. With the government set to loosen fiscal discipline – perhaps to raise wages or adjust income tax thresholds – Bank BGZ analysts suggest that "will cause consumption to grow and inflation to pick up speed."

The finance ministry suggests that overall Duda's policies stand to cost the country PLN400bn. The new president has not explained how his promises could be financed; PiS only said that “the money is there”. 

Unsurprisingly, Finance Minister Mateusz Szczurek argues the opposite. “The room for extra spending, be it pre-election or any other type, is actually quite limited,” he said on May 19. Szczurek earlier this month led Poland out of the EU's excessive deficit programme for the first time in six years, as Brussels accepted that the government's fiscal plans will push the budget gap below 3% this year.

The European Commission may not have yet twigged the implications of the presidential election, but others clearly do. 

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