The S&P anxieties not only regard Poland. What will happen to the zloty? [CINKCIARZ.PL ANALYST'S OPINION]

Jan 18, 2016 9:40 AM|

The Friday's decrease in Poland's long-term credit rating made by the American Standard & Poor's rating agency was a real surprise. Especially that its main reason were the anxieties of the country's institutional stability. How may the zloty behave in the following days and months considering this situation? Marcin Lipka, currency analyst answers this question.

Surprise, shock, incredulity, or - as it was said in the official announcement from the Polish Ministry of Finance - “incomprehensible decision”. This were the feelings that many economists and market's participants (probably not only in Poland, but also abroad) had on last Friday's afternoon. The Standard & Poor's agency (S&P) announced a decrease in the Polish rating from A- to BBB+. This reviewed the perspective from positive to negative.

Many market's observers felt surprised because of a few reasons. First of all, it is the scale of the decrease. The change of long-term credit rating on the level A- (positive perspective) could consist in decreasing the perspective itself to neutral, or further on to negative. If, however, the decision is made about cutting the whole rating, then at least the suggestion of another movement could be neutral. But the selected solution assumes a greater likelihood of further reduction of long-term credit rating than its raising, which is a negative perspective.

Second of all, since 1995 the agencies were only increasing Poland's rating. There was not a case when it would be reduced. This is probably one of the reasons for a strong reaction on the currency market.

Another surprising element is the decision's reasoning itself. The S&P claims that (quote from the Polish Press Agency) “since winning the elections in October 2015 the Polish government initiated a lot of legislative actions, which in our opinion weaken independence and effectiveness of crucial institutions as it is seen in our institutional evaluation”.

Many foreign economists are also quite surprised. This is the new era of ratings, in which the rating agencies tell us that they are more concerned with political events and perspective of reform, than with the positive economic foundations that may sustain the country's rating – said Simon Quijano-Evans, the London based Commerzbank AG economist, who was cited by the Bloomberg agency. However, he added that he will recommend the reduction of exposition on the Polish debt to his clients.

Not only the Polish example

On the other hand, it is worth noticing that the S&P was focusing on the matters related to a general political stability for a longer time. The document from November 6th 2015 entitled “Why is politics significant for the ratings” mentions the case of the United States. In 2011 its rating was cut from AAA to AA+ with a negative perspective due to “political risk, and growing debt”.

The similar situation is currently concerning also the United Kingdom. According to the S&P, its government's decision about the referendum regarding the country's membership in the European Union shows that “the economic policy can be exposed to a greater risk of party policy than it was previously expected”. On June 12th 2015, the perspective of the British rating was decreased to negative.

In November the agency also reminded a decrease in ratings of nine of the euro zone's countries in January 2012. At that time the S&P wrote: “our opinion regarding the effectiveness, stability, and predictability of the European authorities and political institutions is not as strong as previously expected”.

Economic reasons and further consequences

Apart from institutional matters, the S&P expects an increase in deficit of public finance sector in 2016 to 3.2% of the GDP. Elements of increase in expenses mentioned by the agency are the announced, or planned, changes containing (cite from the Polish Press Agency) “withdrawal of the pension reform, which will decrease the pension age back to 60 years for women and 65 years for men; higher benefits for children due to the 500+ program; higher tax-free amount and minimal wage; free medicines for the seniors”.

On the other hand, Bloomberg informs that the agency “can continue to decrease the rating, if it finds that there was a further weakening of independence, credibility, and effectiveness of key institutions, especially the NBP”. “Additionally, the rating can be decreased if public finance significantly deteriorate beyond our base case scenario, and the balance of incomes and expenses becomes more negative”.

When it comes to for the effects of the S&P decision, the one mentioned by Magdalena Polan is very likely to be the most significant, considering the complexity of the whole situation. The Goldman Sachs economist quoted by the Bloomberg agency, claims that a decrease in long-term credit rating may reduce the demand of more conservative investors with raw rating's criteria (such as the central banks) for the Polish assets.

Poland also claims that the agency's decision will “reduce the wallet of obligations kept by long-term investors, and increase sensitivity of the Polish debt and the currency market for the external sentiment and level of interest rates abroad”.

Hypothetical reaction on the zloty

On Friday, right after announcing the S&P decision about cutting the rating, the zloty wore off by 0.10 PLN to the basic currencies. The euro costs currently almost 4.50 PLN. This is the highest level for four years. On the other hand, the dollar costs 4.11 PLN. This means that the American currency is the most expensive for more than 13 years.

One can find many similarities on the market, which are related to a decrease in the country's long-term credit rating. They are, among others, recent examples of decreases in ratings of the emerging markets like Brazil and the Republic of South Africa. Currencies of these countries continue to lose value. On the other hand, the above examples do not reflect the situation in Poland. Economic situation in Latin America or the RSA is significantly worse than in our country. Moreover, these countries are significantly dependent on export of increasingly cheaper raw materials.

A similar example, although still not completely perfect, is the S&P cutting Hungary's rating from A- to BBB+ with a negative perspective on June 15th 2006. The scale of the movement was similar, and additionally parameters of the Hungarian economy are resembling the Polish one. Also, throughout the years the forint was strongly correlated to the zloty. This is a proof that investors treat these currencies in a similar way.

At that time the forint wore off to the euro by approximately 5% within just two weeks. However, this movement was relatively quickly reversed, and in mid-July the Hungarian currency returned to the level from before depreciation. This was probably caused by the relatively positive attitude of the region (at the same time, the zloty gained barely 4%).

The debt market can be a certain danger for the zloty. During the following days its volatility will probably be high. Some of investors may reduce their positions, and some may search for the occasions on the market, encouraged by a lower evaluation of the PLN, and higher profitability of the bonds. This is likely to increase even more the level of the zloty's fluctuations, and probability of the euro or the dollar going clearly above the level of respectively 4.50 PLN and 4.10 PLN.


The S&P decision has a negative impact on Poland's image, and also evaluation of the bonds and the zloty. However, in a few weeks’ time it will probably lose a direct influence on the debt market and the national currency. It is because the market will begin to focus on the global events, and current macro publications from the country.

On the other hand, if the situation in the world or in Poland deteriorates, the investors’ reactions on the zloty and the bonds will probably be even more nervous than it was before. It may also have an impact on the real economy. This may reflect in higher costs for the enterprises related to fluctuations on the currency market. The global commotion may also cause the foreign investors to expect higher profits from the Polish bonds. This could increase a cost of the foreign debt's service.

Thus, rebuilding the previous position can be difficult and time-consuming. If the situation does not improve, investors are very likely to quickly remind the example of Hungary. Since the first cutting from the level A- to BBB+, this country's long-term credit rating decreased during three years to the level of BBB-. After two next years it decreased to speculative-grade. Currently, every rating agency estimates Hungary below investment grade.

Jan 18, 2016 9:40 AM|

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