A SUPPLEMENT TO EUROMONEYPoland’s strong 1995 GDP growth of 7% is a signal that recovery is on its way. The officially projected real GDP growth for 1996 is 6%, although a slight downward revision is highly likely. Poland increased industrial output in 1995 by 9.4%. After an early 14% surge in 1996, the first effects of the German recession reduced demand (Germany absorbs 38% of Polish exports). This combined with real zloty appreciation have negatively impacted exports. Moreover, domestic demand, while growing strongly, is not large enough to replace external demand in maintaining industrial output growth. Nonetheless, industrial output will grow 8% in 1996, underpinned by investment (up 12%) and consumption growth. Labour productivity has grown 9% and real wages 6.2% through Q1 1996 while the unemployment rate has remained unchanged at approximately 15%. Inflation-reducing measuresThe Central Statistical Office has increased its forecast of 1996 inflation from 17% to 19%. A CPI figure of 8.9% through April was caused by an increase in annual services (gas, telephone, etc), higher-than-expected food prices and a continued inflow of foreign currency. The rate of inflation fell approximately 27% on a year-on-year basis, ending the year at 21.6%. With forecasts at 19%-20% this year, little change is projected on a year-on-year basis. Inflation is mainly caused by rising food prices and relatively loose fiscal policy. To reduce inflation would require strong measures, possibly at the cost of retarding GDP. In May, the government and NBP approved a programme to reduce inflation in 1996-1997. Although details have not been revealed, there will probably be some form of wage control in state-owned businesses, government intervention in the food market and a more restrictive fiscal policy. Monetary policyIn 1996, the chief monetary policy goal has been keeping the amount of reserve money in the economy within the monthly band set by the Coordination Committee for Open Market Operations. Since recent trends have not varied from these goals and inflation was higher than anticipated, the National Bank of Poland (NBP) does not anticipate changing interest or exchange rate policy in the near term. Following a one-time 6% revaluation in late December and a reduction in monthly zloty depreciation from 1.2% to 1%, the zloty has traded within the 7% NBP parity range. It has appreciated due to speculative short-term investments and from the inflows arising from cross-border trade. The NBP zloty central rate has increased nominally from 2.468 on January 1, 1996 to 2.7005 on August 1. It is forecast to reach 2.85 by year-end 1996. the export of foreign currencyThere are ministry of finance (MoF) and NBP restrictions on foreign exchange transactions. Although internally convertible, there are limits on the export of foreign currency. Non-residents may hold zlotys in interest-bearing demand and time deposits but cannot convert them into foreign currency for transfer abroad. However, ‘foreign’ accounts, maintained by banks for foreigners, may convert zlotys to foreign currencies. Interest rate policyThe December revaluation of the parity rate to 6% has been followed by zloty appreciation in real terms. As inflation continues to be high, the NBP does not plan any changes in its near-term interest rate policy. In consequence, the average commercial rediscount credit rate, demand deposit rate and one-year deposit rate-have held steady this year at 23%, 11% and 19.5%, respectively. dollar/zloty Pegged zloty devaluationIn the first quarter, exports slowed considerably. Having grown approximately 15% in both January and February, exports fell 7% in March compared to March 1995. Imports are growing strongly at approximately 25%, resulting in a growing trade deficit of $1.45 billion in the first quarter. Last year’s comparable figure was $345 million. However, first-quarter inflows from cross-border trade of $1.82 billion and a net interest payment surplus of $51 million contributed to a first-quarter current account surplus of $77 million. According to NBP projections, foreign exchange reserves will grow to $19.7 billion by year-end 1996. This compares with $14.7 billion last year and $17.5 billion by the end of March. Polish fixed-income marketThe fixed-income market in Poland is very dynamic and growing rapidly to meet the demand of domestic and foreign investors. Foreign investors may purchase any type of security and there is no withholding tax for investors from countries with a double tax treaty with Poland. The largest segment of the market is composed of Treasury bills and notes trading at discounts as well as at fixed and floating rates. The Treasury bill market capitalization is approximately 70% of the Polish fixed-income market which totals about $14.7 billion. High inflation and high interest rates have limited the financing choices for issuers in the past. However, commercial paper and corporate and municipal bond programmes are now beginning to play a role in the market. In addition, the markets have expanded into more sophisticated investments such as zloty-linked, zloty-denominated, and Euro-zloty fixed- income issues. The increasing level of activity in these issues reflects growing foreign investor demand. Investors are eager to participate in the market due to the optimistic outlook for the Polish economy. Poland yield curve Inverted curve reflects optimismTreasury bills and bonds are both issued in dematerialized, electronic book-entry form. The National Bank of Poland acts as the agent for the ministry of finance and settles all Treasury bills purchased in the primary market through the Central Depository on a T+2 basis. There are weekly T-bill auctions which resemble US Treasury-style auctions. The ministry of finance sets the quantities and maturities of T-bills to be issued. The auction consists of submitting competitive and non-competitive bids with a minimum order of Z100,000. Treasury bill auctions have generally been oversubscribed although the demand has diminished since the National Bank of Poland cut rates by 1% in July. Foreign investors in particular are looking elsewhere for higher yields, cutting the inflationary pressure on the money supply. Treasury bills include maturities of four, eight, 13, 24, 39 and 52 weeks. These issues are bought at a discount and par value is received at maturity. In addition, there are five types of bonds outstanding:
The yield curve is currently inverted with the six-month bill yielding around 20% and the two year yielding around 18%. This reflects the optimism of investors that the current inflationary environment will continue to be benign and that the fundamentals of the economy will continue to improve. the secondary marketThere is no market–making system in the secondary market for government securities. The longer maturities have a liquidity problem whereas the Treasury bill market is more active. There are currently three types of markets available for trades on the secondary markets:
Treasuries traded in the secondary markets settle through the National Depository of Securities while the money is transferred directly between custodians. municipal bond marketThe municipal bond market is extremely competitive. As an example, a recent $8 million issue had 10 offers. The larger, more well-known cities already have issues outstanding and there are a limited number of quality municipalities left that can issue bonds. Top-tier companies issue cpThe corporate bond market consists mostly of short-term commercial paper due to the positive expectations for the future and the prospects for lower interest rates. Paper issued by the top-tier companies generally trades at 20bp-50bp over Treasuries. Currently, 10-15 companies have issued commercial paper. These issues tend to be small and the secondary markets are very illiquid. Most investors purchase these securities and hold them to maturity. There are also a number of corporate bonds outstanding with a maturity under five years yielding less than Treasuries. Convertible bondsThe brand new convertible bond market will have its first publicly traded issue appear on the WSE in the next couple of months. The success or failure of this issue will affect the speed of growth of this type of instrument. Exposure to the zlotyThe zloty-linked and zloty-denominated bonds have expanded the fixed-income markets for those investors seeking to gain exposure to the zloty. Prior to these instruments, the Treasury market was the main investment vehicle for exposure to the currency. The crawling peg devaluation system allows foreign investors to more systematically factor in the currency risk and evaluate the returns of these fixed-income investments. Tax strategyWithholding tax is on coupon payments. Of course, many foreign investors are from countries with double tax treaties with Poland and that will minimize or eliminate these taxes. There is currently no tax on accrued interest, thereby resulting in a strategy of selling bonds on the day before the coupon payment. Alternatively, institutions can declare that they are reinvesting in government securities. |
