Even though the date of the British referendum regarding Britain's membership in the European Union has been known for months, investors started to evaluate the forthcoming danger just few days ago. Specific position of Poland in the EU, as well as extraordinary sensitivity of the zloty to recent external events, may cause the country, as well as its currency, to be the greatest victim of Brexit – comments Marcin Lipka, Cinkciarz.pl analyst.
The referendum regarding Brexit on Thursday, should not be a surprise to anybody. Since January 2013 investors were aware that it will occur within few following years. Moreover, its exact date (June 23rd) was announced in February 2016. However, the market, as well as politicians were underestimating the danger for a longer time. This was due to a remaining advantage for the European Union supporters.
According to online surveys that were published for weeks, the votes for and against leaving the European Union are approximately equaled. However, considering the results of the last year's British parliament elections, phone surveys were much more accurate in presenting social sentiments.
Uncertain result of referendum
Traditional survey methods showed a rather safe advantage for the Brexit opponents. Until the end of May it was within the range of 7% - 19%. Even the first online surveys that showed their decreasing advantage were underestimated, as well as defined as irrelevant for the general trend.
Actual anxieties started growing in the beginning of June. At the beginning of this month, eight out of nine surveys were showing an advantage for the Brexit supporters. A similar situation could be observed in phone surveys. Four out of five surveys suggested an advantage for the Brexit supporters within the range of 1% - 6%.
Bookies also estimate that the probability of Brexit increased clearly. Oddschecker and Bloomberg estimations indicated this probability to be less than 20% at the end of May. On the other hand, it reached the level of more than 44% last Thursday afternoon. However, it is possible that the Birstall events may impact the referendum's result. According to the information from the media, murderer of Jo Cox (a deputy of the Labor Party that was strongly involved in the pro-EU campaign) may be related to the extreme right that supports Brexit.
Will this have a crucial influence on the voting? Considering the dynamics of the events, it is very difficult to foresee. However, it is worth noting the entry by professor John Curtice at Whatukthinks.orf website, published on June 18th. Curtice is a leading political scientist in the United Kingdom, as well as a chairman of the British Polling Council. In the summary of his analysis, he claimed that, “the result of a referendum never was more uncertain than it is now.”
EU budget: two billion euro loss per year
Due to the fact that the risk of Brexit is significant, the entire world of finance is trying to estimate its economic consequences. However, it is a paradox that it is not the United Kingdom that would suffer the most due to Brexit, but Poland.
First of all, Poland is an undisputed beneficiary of the EU budget. According to the European Commission data, Poland received the net of 13.7 billion euro in 2014. This is approximately 1/3 of the amount that went to every beneficiary in the EU. Moreover, the United Kingdom is the third largest net payer of the EU budget.
If it appears that the UK leaves the EU, Poland will probably lose approximately two billion euro per year. Moreover, this is not the worst case scenario. After 2020 the EU budget may be definitely less generous for less wealthy countries. Additionally, a negative attitude towards beneficiaries of the EU policy that appears in the Brexit campaign, may quickly be undertaken by the growing Euroskeptic movements in the leading EU states.
Hampered trade exchange
Brexit may lead to some serious consequences for the Polish trade exchange as well. According to the Polish Central Statistical Office (GUS) data from 2015, the United Kingdom is the second biggest export market for Poland. The country has shipped more than 50 billion PLN worth of goods to the UK.
However, it is not the export value itself that is the most important. Poland receives a 30 billion PLN surplus from the trade exchange with Britain. This is more than Poland's entire positive balance of trade with other countries, as well as more than 1.5% of the GDP. If it appears that the UK decides to protect its market more after Brexit, our entrepreneurs will have to search for other markets. This, on the other hand, would mean additional costs, lower incomes and worse development perspectives.
Brexit may have a negative impact on the foreign direct investments (FDI) to Poland as well. According to the data of the Ministry of Development, the United Kingdom is at 10th position among the biggest investors in Poland. Despite that, some of these investments are going to pharmaceutical sector that is a part of perspective industry, and it generates a high added value.
Another serious element regarding the FDI, may be an aversion towards the entire region. Investors from the other parts of the globe may begin to look skeptical at many EU states. This concerns especially the states that may experience a clear deterioration of situation, in the case of questioning the existence of the entire EU.
Evaluation of the Polish loses regarding the GDP growth may be quite difficult. According to the German DIW institute, in 2017 Brexit will decrease Germany's GDP by 0.5%, as well as it will limit export by 15 billion euro. On the other hand, according to calculations of the Hungarian Ministry of Economy, Brexit will reduce the economic growth by 0.3-0.4%.
Considering the above estimations for other countries of the region, we can assume that the Credit Agricole scenario is realistic. It assumes that the Brexit will decrease the Polish GDP by 0.5%. However, we cannot exclude a more negative situation development. The Morgan Stanley economists that were cited by the Polish Press Agency (PAP) claim that the extreme scenario assumes a 1.4% decrease in the GDP in 2017.
Zloty is the biggest victim of Brexit
How can the zloty behave on Friday morning, if it appears that the Brits voted for leaving the EU? Condition of the Polish currency from the recent days may be a certain hint. Exchange rate of the franc, euro and the dollar were perfectly co-related with an increasing risk of Brexit that was published by Oddschecker and Bloomberg.
On the 9th of June when the probability of Brexit was approximately 25%, the franc costed 3.95 PLN.
On the other hand, last Thursday, when the risk of Brexit exceeded 44%, the Swiss currency costed approximately 4.13 PLN. The exchange rates of the euro, as well as the dollar, increased at the same time 0.14 PLN and 0.21 PLN, respectively.
At that time, the zloty was the weakest among thirty-one currencies of the developed markets, as well as of the emerging markets. It lost approximately 5% against the dollar. The zloty was worse than the Mexican peso, the South African rand and the Russian rouble.
What is the reason for significant sensitivity of zloty?
Of course, investors are aware of potential problems of the Polish economy in the case of Brexit. The market estimates them by currency exchange rate, as well as profitability of the Polish debt. This week, the difference between German and Polish ten-year treasury bonds increased to the highest level since September 2012. That was the period when the existence of the euro zone was endangered.
We may also assume that the current situation is disturbed by actions that are clearly speculative. However, their appearance very often equals the risks that are present in particular country, and not only in its surrounding. The rating downgrade by Standard & Poor's, the decrease in perspective by Moody's, unregulated matter of credits denominated in franc and a danger of exceeding 3% on the GDP of public finance sector, cause the speculative actions to be easier to conduct.
Thus, it is not surprising that the banks such as HSBC, Rabobank and Morgan Stanley, expect an increase in the EUR/PLN rate to approximately 4.60 PLN in the case of Brexit. It is also worth noting that the move on the franc, as well as on the dollar may increase. This is because it is a common attitude that investors claim that the Swiss, as well as the American currency, will both strengthen against the euro in the case of Brexit. Combination of both of these moves may cause the exchange rates of the franc, as well as of the dollar, will be approximately 4.40 PLN and 4.30, respectively, on Friday morning.
For how long will zloty remain weak?
Another element of uncertainty is the time range of the zloty's wear-off. Will the effect be rather temporary, and after the first weeks of panic sale the euro will cost 4.20-4.30 again, and the franc returns below 4.00? Or will the wear-off increase?
Of course, much will depend on how will the sector of the real economy in Poland, as well as abroad, refer to the market nervousness. If due to uncertainty of the future fate of the EU entrepreneurs will withhold their investments, and due to fear of the crisis consumers limit their expenses significantly, exchange rate of the zloty will continue to be low for months.
According to the American Morgan Stanley investment bank (MS), in the case of Brexit the euro would be within the range of 4.60-4.65 at the end of the year. Moreover, the MS economists claim in their report from June 16th that the EUR/USD, as well as the EUR/CHF will decrease to 1.00-1.05 and 1.02-1.05, respectively, at that time. When calculating exchange rate of the franc, as well as the dollar against the zloty based on the above estimations, we receive 4.38-4.56 for the Swiss currency, and 4.38-4.65 for the American currency.
Even though the above estimations can be currently interpreted as quite pessimistic, it is worth noticing that approximately 15% changes in the currencies within six months were nothing unusual in the past years. Moreover, as it appears in the past few days, the zloty is basically a hostage of the Brexit anxieties. Thus, if the United Kingdom leaves the EU, the Polish currency will probably be under large pressure of sellers. Therefore, the Morgan Stanley scenario has a big chance to become valid.