Strong fundamentals will ultimately prevail
Overview:
Polish financial markets have sold off sharply since the summer in line with most other Eastern European emerging markets. Poland’s economic outlook has certainly been adversely impacted by a series of external shocks: high oil prices have boosted inflation and swollen imports; export growth will slow as a result of weaker external demand; increased risk aversion on the international capital markets will reduce the availability (and raise the price) of credit, slowing economic growth. However, Poland should weather the ensuing global downturn better than many of its peers given its relatively strong economic foundations. The current account deficit is relatively well financed, its debt ratios are respectable and the banking system appears to be sound. The government is committed to economic reforms and Euro adoption.
Recommendation:
Despite a significant economic slowdown, the sharp depreciation of the zloty and the existing tightness of the labour market will limit the scope for interest rate cuts. Indeed, any prolonged failure of the zloty to recover might suggest further tightening. We remain overweight on the Polish zloty in the medium-term despite the recent sell-off. Polish fundamentals are strong. Once the process of savage global deleveraging is over the financial markets should eventually return to differentiating between credits on the basis of the strength of their economic policies.