— Over the course of three days, we met with more than 30 major foreign investors. They remain very optimistic about Poland. The honeymoon, which began after the parliamentary elections last October, is continuing. They underscore the uncertainty regarding the release of EU funds, says Ernst Petlarczyk, chief economist at Bicau Bank. They also held a round of meetings with foreign investors, among others: PKO BP and Santander Bank Polska.
— The mood of foreign investors has changed in recent months. Immediately after the elections, there was almost euphoria, and then there was a moment of hesitation, because they were affected by reports from Poland about the arrest of MPs and concerns about double legality in our country. Now the mood has improved again, and the doubt is gone, though he is far from ecstatic – Reports Piotr Bielski, chief economist at Santander.
See also: Ursula von der Leyen in Poland. Decisions on funds were made from the KPO
He adds that The bumpy road to restoring the rule of law has not proven to be an obstacle to releasing EU funds. Investors expect an improvement in the institutional system and level of state administration, and the prospects for economic growth are good.
The worst is over, and the Polish economy remains strong
Economists explain that there are a number of factors behind the good mood of foreign investors. — First of all, the strength of the Polish economy, which has had a difficult time of high inflation and high interest rates for good measureThe labor market remained strong. Poland's economic growth prospects in the coming years will be higher than other European countries. Structurally and in terms of competitiveness, the Polish economy is still in good shape, Petlarczyk emphasizes.
He adds that the high interest of foreign investors in Polish assets, manifested in large capital inflows, translates into the good behavior of Polish treasury bonds. We notice a decrease in the risk premium. Investors realize that the MPC will not cut interest rates quickly, so our Treasuries are not the most interesting tool for them right now. However, since inflation is falling and there will be no cuts at the moment, this means that real interest rates will remain high, so this is an opportunity for them to continue trading. – says an economist from Bikao Bank. Carry trading is (in simple terms) getting money at low interest rates and investing it safely at higher rates.
See also: The market has believed the Tusk government. However, he could have misjudged his optimism
After the parliamentary elections in October 2023, there was a change in the MPC's rhetoric, which has since become more hawkish: it began to pay more attention to pro-inflationary factors and indicate uncertainty in this area, paying less attention to economic activity. Or the labor market. Although inflation is falling significantly and is already within the permissible range of the National Reserve Bank's target, the votes of the Monetary Policy Board and comments from Chairman Adam Glabinski suggest that there may be no interest rate cuts this year, which has been the case recently. One of the factors supporting monetary policy. Zloty.
— Investors are noticing the unpredictability of the monetary policy board. However, there are also more optimists than skeptics here: They believe that it is worth being on the Polish bond market, but the uncertainty is greater than in the case of the Polish zloty, especially in the short term due to the politics and confusion surrounding President Glapinski – notes Bielski, referring to the measures and the goal of the ruling coalition was to introduce the head of the central bank. before a state court and removed from office (or at least heard before a parliamentary committee).
Uncertainty about monetary policy
Signals coming from the Monetary Policy Council indicate that the trend to lower interest rates is low. This is not a factor that supports Polish bonds with shorter maturities, but it may be beneficial for longer-term bonds, because the more restrictive monetary policy is, the more investors will be confident that it will be possible to bring inflation permanently to the target. “, says an economist at Santander.
In his opinion, foreign funds and banks realize that before the elections, the MPC went too far with interest rate cuts (surprise cuts of 0.75 percentage points in September and 0.25 percentage points in October) and the MPC may now pursue a more justified monetary policy policy. .
– The problem is that there is no complete understanding of how the central bank will act if the political dispute escalates around the president. For example, if the issue of a bond sale by the Polish National Bank returns, this could disrupt the market. This kind of uncertainty increases the risks of investing in Polish bonds, and this awareness exists among foreign investors, says Bielski.
In mid-January, Ireniusz Dabrowski, a member of the Monetary Policy Board, suggested that if there was high demand in the Polish economy, the Polish National Bank would have to consider shorting its position in Covid bonds and sell some of these securities on the market to raise surplus money. The issue was widely commented on and aroused controversy, but President Glabinski himself and the Polish National Bank distanced themselves from such a proposal.
– In the event of disagreements over the head of the Polish National Bank, foreign investors see the possibility of turmoil on zlotys and bonds, but it will be temporary. I am not trying to evaluate the importance of this metric. Investors are aware of this conflict, but it has certainly not been a major topic of discussion. They have a positive attitude towards the zloty and from conversations with them we can conclude that our currency may still rise. The zloty, as well as the shares, will be supported by, among other things, the flow of funds from the KPO – reports Pytlarczyk.
See also: Poland returns to investors' favor. Where did the post-election miracle on the stock market come from?
It also indicates that investors do not fully understand the function of the monetary policy board's reaction. — Some people still hope that the MPC will soon start cutting interest rates, given that inflation is falling and the European economy is in trouble. We convince them that the MPC may not start easing, because the underlying inflation momentum is still high and a strong zloty is needed to bring inflation to the target, even though this will have a negative impact on the real economy. However, the economy will still be able to adapt thanks to the KPO, expected good investments and strong consumers thanks to rising real wages – according to the calculation of the economist at Picau.
Good conditions for zloty and Polish stocks
Economists confirm that the significant improvement in the mood of foreign investors comes at a time when Poland was suffering from a significant deficiency in its investment portfolios, meaning that its investments in our assets were less than it could theoretically be. This means they can increase their exposure to our market.
— They are very positive about the zloty exchange rate, although it seems to us that this is the common situation that everyone has already invested in the Polish currency and has already built positions. I'm not saying that this is the end of the possibilities for strengthening the zloty, because there are still positive factors ahead, such as the inflow of funds from the European Union, and the MPC will be reluctant to cut interest rates. “It is possible that the EUR/PLN exchange rate will fall, but I don’t think there is much room for further declines,” says Bielski. A few days ago, the euro temporarily fell below PLN 4.30, its lowest level in almost four years.
According to analysts, the strong economy and money coming from the European Union also have a strong positive impact on foreign investors' perception of Polish stocks. — In this case, investors maintain a high degree of confidence. They hope that corporate governance in state-owned enterprises will improve and that state interference will decrease. Although things like extending credit holidays, even if not as common as the previous ones, worry them a bit. They hope that the state will not interfere in taxing individual industries and will not increase regulations. They have high hopes, but whether they will be fulfilled is another matter, Petlarczyk says.
He adds that they are beginning to run out of patience, and realize that we have two more election campaigns ahead of us, and that there may be some tensions related to political promises. – The fact that the mood is better than a year ago is evidenced by the fact that investors were wondering, for example, whether the regulations will allow banks in Poland to achieve good results and pay good dividends – says an economist from Bekow Bank
What threats do foreign investors see?
Investors are concerned with various risks. — For example, Germany will likely focus on our financial situation and whether or not it will impact the rating. Although I personally think that our rating is not in danger. They point out that the fiscal deficit is high and it is not entirely clear how it will decline in the coming years, taking into account significant spending on the military or energy conversion as well as expensive election promises and income challenges. Maybe in April, during the APK, we will know more whether the government has a plan to reduce the deficit and what the plan is – says Santander's Belski.
In the latest forecast, his team estimated that the general government deficit this year would reach 5.5%, which is much higher than in good years and higher than the 5.1% that the government had planned.
— There is no risk premium in Polish assets. That means now Foreign investors are not too concerned about the geopolitical risks associated with the war in Ukraine. They believe that our presence in NATO reduces these threats. Nor do they suggest that this risk premium should be taken into account. It is also absent in the case of politics, which has been helped by improving relations with the EU, although there are of course questions about attempts to remove the NBP president, says Becau's Petlarczyk.
There are new people interested in investing in Poland
There are also clear changes in the structure of investors. Poland has become modern. The geographical scope of investors interested in our country also expanded, including: Investors appeared from Brazil. You can see the positive attitude. This is partly due to the good situation on global markets, but also largely due to the specific advantages mentioned in Poland – explains Petlarczyk.
See also: Currently, there are no financial changes that are beneficial to taxpayers. “Budgeting is difficult.”
After a long period of inactivity, players from Southeast Asian countries once again expressed their interest in the Polish market. A decade ago, Poland looked to them like an “emerging market star,” a country that was more or less institutionally sophisticated and offered greater security, but at the same time offered higher rates of return, typical of developing countries. Later, there were problems with the rule of law in Poland and investors from this region, especially central banks looking to invest their reserves and government investment funds, withdrew from Poland. After the elections and the confirmation that we belong to the main countries of the European Union, they began to look at our country more positively again – Belsky points out. In his opinion, this can ensure a stable and long-term flow of capital, which is even more evident in the case of bonds from the Polish zloty.
Author: Maciej Rudki, journalist at Business Insider Polska
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