Mounting political risk pushed the zloty down to two week lows in morning trade on Wednesday

Mounting political risk pushed the zloty down to two week lows in morning trade on Wednesday, after president Kaczynski indicated clearly that he would opt for the shorter of the two budget deadlines, giving the parliament just two weeks to work on the act. It increased the chances of early elections. Meanwhile PM Kazimierz Marcinkiewicz assured opposition parties that the budget could be completed in time, although this would require their full cooperation in parliament.

Later in the day, the zloty found support from the relatively well bid 5Y bond auction, which took the market’s mind off politics for a short while and helped bonds recover gently. The EUR/PLN retreated to the 3.85 area and market shifted into wait and see mode. Lech Kaczynski’s brother and PiS leader Jaroslaw proposed to end the budget stalemate with an agreement, according to which the president would not call for earlier election in return for which the smaller parties would unconditionally pledge to support the budget and a pack of other key “stabilizing” bills in parliament. Meanwhile the president himself issued a statement confirming that he would call a snap poll if the conservatives failed to find partners for a stable majority in parliament for at least a year.

The negotiations between PiS and Self- Defense failed as the last one required seats in the government what was not accepted by the governing party. However it seems that smaller parties (like LPR and PSL), that are currently in the corer with high risk of not being re-elected, have a strong incentive to collaborate with PiS. One of LPR leaders called the PiS offer “rational”. Temporary subordination of LPR (32 seats), PSL (25 seats) and independent parliament members (5 seats) would give PiS 217 votes of 230 needed to have a majority in Sejm. From our perspective other 13 votes could be easily “acquired” among Self-Defense or Civil Platform members.

The problem is that such a “coalition” would be only short-term lasting. It is the truth that this would protect the budget bill from putting into it over-expensive amendments that would cause explosion of the budget at some point in time, what opposition parties probably intended proposing them. However there could be a problem with support of these opposition parties to other “stabilizing bills” since more time is needed to pass them through the parliament and it is hard to believe that they would stay in the corner for so long.

We expect the zloty behavior to be mainly driven by politics in the coming days. If likelihood of a call for earlier elections increases, it may send the zloty to even weaker levels. If it occurs that opposition is willing to “collaborate” with PiS, the currency may return to strong levels below 3.80 EUR/PLN. The IP data that will be published today at 16.00 may bring some deterioration in the appetite for PLN, as our forecast at 4.0% is about a half of the market consensus.

(CSOB - Investment research)