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Zloty finished the day in red

Zloty finished the day in red

23.06.2006 9:47

The zloty got off to a strong start of the day on Thursday buoyed by news on the Slovak central bank intervention the day before but ran out of steam relatively quickly in the 4.06 EUR/PLN area before retreating to pre opening levels by mid morning and eventually ending the day in the red against both the euro and dollar. S&P’s critical report on the prospects for zone euro zone candidates triggered more zloty selling later in the session. The agency pointed out, that along with Hungary, Poland could enter the EMU later than previously thought due to the widening fiscal deficit and political turmoil. As we have stressed before in the current healthy macroeconomic situation a reduction in the general government deficit to 3.0% of GDP should not be a major problem over the coming 2 - 3 years. However, it is worth remembering that the Polish deficit will almost certainly be evaluated with the use of Eurostat’s standards and this means that the contributions to the open-ended pension funds will be included in the private sector, hence increasing the deficit by approximately 2% of GDP per annum.

Meanwhile, the government’s current convergence plan targets a drop in the deficit to GDP ratio to just under 2% (according to the Polish methodology) in 2008. Therefore, in order for Poland to enter ERM-2 at the beginning of 2009, it would be necessary to make an additional fiscal adjustment of slightly less than 1.0% of GDP. Even though this does not seem to be an excessively ambitious task, its achievement would require political will to reduce spending and to adopt the euro itself as quickly as possible and neither of these is visible in the current political situation. We believe that the zloty’s road to ERM-2 will end no earlier than in 2010 and since Poland would need to remain in this system for at least two years, this postpones the realistic date for adopting the euro to 2013.

Fresh speculations on the resignation of finance minister Zyta Gilowska appeared in one of the leading daily newspapers today morning. The paper suggests that Gilowska could be charged by prosecutors for the cooperation with the socialist regime’s secret service, which she has repeatedly denied in the past. This is obviously bad news for the already shaken zloty – the speculations could push the unit past 4.10 EUR/PLN today, and if confirmed even further down in the days to come. The data front is relatively heavy today, with the retail sales and unemployment numbers at 10:00 GMT and the core inflation figures due later in the day at 14:00. The stronger thanexpected wage report and surprisingly robust May industrial output data suggest the sales reading will also top the market consensus of just under 12% y/y. However, since the largest rise in output took place in export-linked manufacturing branches the sales result is unlikely to be equally over the top. Nonetheless a stronger reading would be more bad news for the already weak bond market sentiment and hence also negative information the zloty.

ČSOB Investment Research

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