Some Thoughts On Poland Ahead Of The Elections

Old Town panorama of Warsaw

Dr. Win Thin provides an overview of the Polish Elections as well as the political, economic, and investment repercussions.

INTRODUCTION

The second round vote for the Polish presidency takes place on May 24.  Poland’s president can veto legislation, is commander-in-chief of the armed forces, and has some say in foreign policy. While the post is largely ceremonial, the election will set the stage for parliamentary elections in October, when the next government will be determined.  Given the strong showing for the opposition, these elections will determine Poland’s path for the next few years.  Will it remain on the current orthodox path, or will it veer to a more populist one?

POLITICAL OUTLOOK

Incumbent candidate Bronislaw Komorowsi of the ruling Civic Platform saw his support fall sharply in recent months.  As a result, he narrowly came in second (with 34% of the vote) to candidate Andrzej Duda of the opposition Law and Justice (with 35%) in the first round.  The two go to a runoff vote.  Komorowski seems to have won the recent televised debate, and has seen his support rise.  The most recent poll shows Komorowski with 47.5% support vs. 46.1% for Duda.

Still, Civic Platform must be confounded by the apparent success of the opposition.  The economy has been one of the best performing in Europe, and avoided recession even during the Great Financial Crisis.  Living standards are improving, yet something has been lost in translation.  Some media outlets are speculating that high unemployment and low wages that still persist for many Poles show that the nation’s progress has been uneven.

POLICY RISKS

No matter the outcome of the presidential election, policy risks in Poland are rising.  Already, there are signs of backsliding.  Komorowski just announced plans to allow pension benefits after 40 years of work, answering Duda’s plan to lower the retirement age.  Even if the incumbent Komorowski wins, his Civic Platform (led by Prime Minister Ewa Kopacz) will most likely lean a bit more populist in the coming months ahead of the parliamentary elections.  Local press is reporting that the government is considering tax breaks, especially for low income earners.

If opposition Duda wins, then Law and Justice will have a good chance at winning the parliamentary vote, steering Poland significantly more towards a populist policy mix.  How bad could it be?  The current Civic Platform-led parliament raised the retirement age three years ago as part of its efforts to rein in spending.  That is clearly at risk now.

Duda is also sticking with Law and Justice’s plan last year for increased taxes on banks and retail chains.  Converting Swiss-franc loans at the original exchange rate they were taken has also been proposed by Duda, which the Finance Ministry estimates could cost banks as much as PLN55 bln.

As the fiscal outlook has improved, the European Commission just recommended that the EU end its excessive deficit procedures for Poland that have been in place since 2009.  That procedure required Poland to freeze public wages and increase some taxes, which is likely part of the drop in Civic Platform’s support with voters.

ECONOMIC OUTLOOK

Data out of Poland today was decidedly soft, but the overall trend appears strong.  Industrial output contracted -8.1% m/m in April, down from 13.4% in the previous month.  Retail sales came in at -2.1% m/m, compared with expectations for a +1.0% print, with motor vehicles particularly weak.  On top of this, PPI fell -0.3% m/m, lower than expected.  The data is probably not enough to tilt the current line of the central bank: no more cuts from the current 1.50% rate, but no hikes in the foreseeable future. After hitting a low of -1.6% in February, CPI inflation seems to be gradually picking up, and the central bank projects GDP growth to come in at around 3.5% for both 2015 and 2016.  The IMF has similar forecasts.

The budget deficit is improving on a year-on-year comparison.  The April figure was -PLN16.7 bln, compared with last April at -PLN21.3 bln.  The Finance Ministry expects the deficit to come in below -3.0% of GDP this year.  In another vote of confidence, the European Commission recommended that Poland be lifted from the excessive deficit procedure.  Indeed, the EC sees the budget gap falling to -2.8% of GDP in 2015 and -2.6% in 2016.  Those forecasts are at risk due to the recent political developments.

Looking at the external accounts, March was a bumpier month.  The current account surplus widened sharply to EUR1.93 bln, almost double the average forecasts.  The improvement was largely due to the income account and inflows from the Common Agricultural Policy.  The central bank sees the full year current account at -0.9% of GDP for 2015.  While IMF and EC forecasts are a bit higher at around -1.8% of GDP, this is still manageable and largely covered by FDI inflows.

INVESTMENT OUTLOOK

S&P recently upgraded the outlook on Poland’s A- rating from stable to positive.  Our model has Poland at BBB+/Baa1/BBB+ and so do not believe an upgrade is warranted to actual ratings of A-/A2/A-.  Indeed, fiscal slippage appears likely in the coming quarters that could ultimately hamper any improvements in creditworthiness.  A rising budget deficit could also weigh on bond prices due to extra supply, pushing up yields.

Poland ranks high in our EM Equity Allocation Model for Q2 2015.  We currently recommend an overweight position, up from neutral in Q1 2015.  MSCI Poland is up 6.3% since our last model update in April, outperforming MSCI EM (up 1.6% during the same period).

On the other hand, Poland is ranked neutral in our EM FX Model for Q2 2015, up from underweight in Q1 2015.   We expect the zloty to trade with the rest of EM FX.  Given our call for Fed lift-off in September, we believe selling pressure on EM will continue.  EUR/PLN has largely been in a 4.00-4.10 range but if EM selling picks up as we expect, look for an upside breakout toward 4.20.  Retracement objectives from the January-April drop in EUR/PLN come in near 4.1200 (38%), 4.1675 (50%), and 4.2150 (62%).