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Monday’s mild sell-off of the Polish zloty extended into early trade on Tuesday

22.02.2006 11:12

Monday’s mild sell-off of the Polish zloty extended into early trade on Tuesday with the market oblivious to comments from FinMin Zyta Gilowska on the 2007 fiscal tightening perspectives. Gilowska reiterated, in reaction to the European Commission’s critique of the government’s EU convergence strategy, that she would look for additional spending cuts in next year’s budget, so that Poland could meet Eurozone entry criteria faster than planned. Gilowska said that it would be ideal for Poland to curb spending by 0.8-1.0% of GDP next year, which would mean that it could fulfill the deficit criterion as early as in 2008. This is coherent with the MinFins view that Poland could adopt the common currency as early as in 2010-2011. Nonetheless given the rather frail political outlook we are highly skeptical on whether such deep fiscal tightening will be possible in 2007.

The market also seems to have its doubts as the zloty failed to react to the FinMin’s declaration, even though PM Kazimierz Marcinkiewicz backed the spending cuts later in the day. At the same time the government rejected Self Defense’s proposal to cut excise tax on fuel for farmers that had been in fact written into the so-called stabilization pact. From our perspective it could bring about some noise from the populists and eve rise the tensions within the block of parties that had enter in the power-sharing deal. The EUR/PLN eventually came just short of the 3.78 mark before returning to the 3.77 area at the end of trade.

After the market closing rate-setter Andrzej Wojtyna gave his support to the idea of fiscal tightening. He suggested that EU would not be satisfied the last update of the convergence program, since Polish economy is currently entering in a period of strong growth, when the state should cut spending. Wojtyna also proposed that the government should declare a euro-zone entry target date, which in turn could mobilize implementation of needed fiscal reforms. With the calendar empty today the zloty should remain range bound today and is likely stay in the 3.75-3.79 EUR/PLN area until next week’s decision on rates.

(CSOB - Investment research)

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