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Unpredictable Polish Election Leaves Markets in Limbo

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An unpredictable election in Poland is causing uncertainty in the country’s economy, with potential consequences for the zloty, domestic bonds, and Polish stocks. Pre-election polls suggest that the ruling nationalist Law and Justice party (PiS) will win on Sunday but fall short of an outright majority. This could result in fragile coalitions or even a political vacuum, leading to further economic challenges.

Viktor Szabo, a portfolio manager at asset manager abrdn, describes this as the most important election in Europe this year. Markets have not fully priced in scenarios such as a hung parliament or the possibility of an early election, and months of political stalemate would be detrimental to Polish assets.

Investors are closely watching the future of Poland’s relationship with the European Union, monetary policy outlook, domestic borrowing, and spending plans. Foreign investors have withdrawn $2.3 billion from domestic government bonds and currently hold less than 15% of outstanding bonds, the lowest level in over a decade. Both PiS and its mainstream rivals are promising increased spending, potentially creating inflationary pressures alongside rate cuts from the central bank.

The main concern among investors is the outlook for Poland’s relations with the EU, as PiS has been in conflict with Brussels over rule of law issues during its eight years in power. The government’s record of undercutting liberal democratic rules has resulted in €110 billion ($116 billion) of EU Cohesion funds and the Recovery and Resilience Facility (RRF) being frozen. If the opposition liberal Civic Coalition (KO) were to win, investors expect a possible thawing of relations with the EU and the unlocking of funding. This scenario would have a positive impact on the currency and Polish equities.

Polish stocks have attracted $273 million of foreign investor money so far this year but have lagged behind their peers in Romania and Hungary in terms of gains. Nonetheless, the percentage of emerging market fund managers looking to invest in Poland’s stock market has risen to over 50% by the end of August, indicating growing interest.

The zloty could strengthen to 4.2 to the euro under an opposition-led government, a level last seen over five years ago. However, under a PiS administration, the zloty could weaken to 4.85 by the end of the year. The current exchange rate is 4.5 to the euro, which is close to fair value as calculated by Goldman Sachs.

Poland’s currency has been affected by political events, including a surprise rate cut by central bank governor Adam Glapinski in September, despite double-digit inflation. This move raised concerns about the independence of the central bank and its susceptibility to political influence. However, the country’s strong sovereign balance sheet and healthy foreign direct investment flows have helped alleviate some worries, especially for those invested in Poland’s hard-currency bonds.

Regardless of the election outcome, investors generally expect the central bank to adopt a more committed stance after the elections to bring inflation back to its target. Kaan Nazli, a portfolio manager at Neuberger Berman, emphasizes the importance of yielding to the economic circumstances regardless of political factors.

Overall, the Polish election has significant implications for the country’s economy and markets. The outcome will determine the future of Poland’s relationship with the EU, monetary policy decisions, and investor sentiment. The uncertainty surrounding the election has already affected foreign investment and may continue to impact Polish assets until a clear result is achieved.

More detail via Reuters here… ( Image via Reuters )

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