Poland and Ukraine’s successful UEFA Euro 2012 bid was no doubt the most important news headline of the day on Wednesday. The stock market reacted frantically the information – the WIG index soared to fresh highs above 60 thousand points led by construction and hotel companies some of which recorded up to 30% mid day gains, before retreating to pre-decision levels as the enthusiasm slowly faded. The zloty’s reaction was far more subdued from the start. Despite the positive effect the decision might have on the overall economic sentiment in the coming years as well as the expected direct impact of euro
-related investments on growth in the run up to the tournament investors were, not surprisingly, far more cautious in their judgments.
First of all, the tournament is still 5 years away from now, and that is certainly not the time frame most market players have in mind. Secondly, even though it’s a reasonable assumption, that the project may speed up the utilization of funding on infrastructural development (which would be positive both in terms of current pace of growth as well as the economy’s potential in the longer run), economic expansion is running at full speed and the tight labor market conditions (particularly in construction) are already becoming a concern. The increased demand for labor is likely to keep wage pressure (at least in certain sectors) elevated and could pose a major inflationary risk if it transpires to the rest of the economy, and along with the more expansive fiscal policy, could push interest rates further up in the foreseeable future.
According to rough estimates roughly EUR 20 bn worth of public spending will be needed to co-finance and finance the necessary investments over the 5 year period, which will be an additional burden on the central and local government budgets in the coming years. Even though we are far less concerned by this than by the other spending plans the government has for the coming years it must be said that the EMU deficit requirements have note yet been met even once (despite the surprisingly strong performance from the real economy). Moreover inflation is already close to breaking above the Maastricht criterion which could mean that Poland may have just made a trade-off between the football euro
2012 and … adopting the euro
in 2012. On balance we would treat the news as mildly positive for the zloty in the longer run (due to the better growth perspectives and marketing effect), but we also believe that financial markets will be aware of the underlying risks to inflation and fiscal performance and will not jump to far-fetched conclusions just yet