The business cycle

FX – Poland: Zloty.

By February 14, 2019 February 21st, 2019 No Comments

EUR/PLN exchange saw a mild weakening of the zloty from 4.2 to 4.3 in the first 14 days February, coincident to accentuating growth concerns in the Eurozone and possible spillovers on Poland. The Monetary Policy Council meeting of the National Bank of Poland held on 5-6 February, highlighted a deterioration of the global economic situation and downward pressure on inflation, signaling a bias to keep the policy rate on hold in 2019E and probably 2020E.

Going forward, our currency model suggests that there is scope for a PLN appreciation against the EUR in 2019E and 2020E. Our model predicts fair value around 4.1 EUR/PLN, while Bloomberg consensus projections currently forecast a stable currency at 4.25/EUR at 2019E eop and 4.20/EUR at 2020 eop. Our model appreciation in fair value is driven mainly by factors impacting purchasing power parity (helped by relatively low inflation) and our assumptions of a generalized GDP growth slowdown. Regarding the turnaround of the global business cycle, we see GDP growth of Poland to decelerate, respectively to 2.9% and 2.5% in 2019E and 2020E. A slower but a still significant pace compared to the Eurozone, which we expect to decelerate to 0.7% in 2019E and 1.3% in 2020E . Regarding inflation, we forecast inflation to average 2.0% in 2019E and 2.2% in 2020E in Poland, with the policy rate steady at 1.5% for the coming years.

Our model prediction may prove too optimistic under two scenarios. First, if the Swiss franc loan bill is passed in parliament and leads banks to convert part of their loan book on the FX market, putting mild depreciation pressure on the currency. Alternatively, a bias to appreciate could be offset by an increasingly dovish stance by the central bank, which is already facing protracted low inflationary pressures, which are weighing on corporate profitability.

On the funding side, the current account is fairly balanced, fluctuating on a 12-month sum % of GDP basis between 0.1% to -0.7% from January to December, with inflows from FDI being the main source of funding currently worth 1.6% of GDP.