Polish markets drop on pension overhaul plan

By bne IntelliNews September 6, 2013

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The Warsaw Stock Exchange tumbled by over 4% and bond prices fell on September 5, after the government announced a pension reform plan that looks likely to remove a large chunk of demand for assets.

The government announced on September 4 that it will transfer PLN121bn (€28bn) in bonds held by private pension funds to the state system, and subsequently cancel them to curb the public debt. The reversal of the pension reform from late 1990s has long been in the works as Warsaw looks to alleviate fiscal pressures.

That made the sharp drop on the WSE somewhat surprising. Wieslaw Rozlucki, former head of the exchange - the largest in CEE - told the Financial Times: "I'm really taken aback - I had thought this would have been priced in." The 4.16% fall on the WSE followed a pullback of 2.14% on September 4.

However, the option selected by the government will shake up Poland's financial markets due to the role previously played by the private pension funds (OFE). Although they will initially be allowed to keep equity holdings - worth PLN111bn at the end of July, according to Bloomberg - even some of those will end up in state coffers. Part of the reform will see savers' assets gradually shifted as public pension vehicle ZUS takes over as sole payer of pensions.

While the reform is forecast to cut Poland's state debt - which has been hovering around constitutional limits for some time - by up to 8%, it has dented the confidence of investors in the previously strong credentials of the government of Donald Tusk.

It will also wipe out the WSE's advantage over other markets in the region. OFE equity holdings account for 19% of Poland's domestic market capitalization, and 39% of the free float. That has helped make the bourse a CEE equities hub, with the Polish market increasingly sucking up IPO business from across the region.

In back-of-the-envelope calculations, Renaissance Capital estimates that the reform could spark potential net outflow from Polish equities of around PLN5bn-6bn. Hand in hand with the PLN3.7bn of stocks the state plans to sell under the privatisation plan in 2014, "this would be enough to make a sizeable dent in the PPPP (the Polish Pension PE Premium)," the bank suggests.

"The premium has already come down from 43% to 26% over recent days," it notes, "a contraction that may have further to run, albeit on a more gradual basis, given the long lead time before any changes will be implemented (2014)."

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