Monitoring Poland: Little room for fiscal stimulus
We expect Poland to enter a recession in 2Q20, as GDP is likely to contract by 4.5% YoY this year. The fiscal response is likely to be muted, effectively only 1.7% GDP of new spending this year – as the fiscal space was largely exhausted by generous social benefits ahead of the 2019 elections last year. We think a 25bp rate cut is on the cards too in May or June
- Poland launched an anti-crisis program of about 9% of GDP, we argue that only 1.7% of GDP is new spending, which should put a burden on the budget and provide direct support for companies and households. Other elements i.e. 1.4% of GDP are public investments, which should be either spread over 2020-21 (because their implementation may last too long), or already planned/existing investment should be counted there. The program also includes liquidity measures from NBP (3% of GDP) and public guarantees and liquidity measures from the national development bank BGK and the Polish Development Fund (another 3% of GDP). Important tools but not burdening directly state budget. For more details see our note.
- The measures won’t prevent a deep recession with a trough in 2Q20 (-8% YoY). This reflects i.e. a multi-week lockdown undermining natural buffers of Polish economy ie strong local and Eurozone domestic demand and production shutdowns. Poor real economy figures will be published in 1-2 months. We expect them to trigger an additional 25bp rate cut (either in May or June). The argument against deeper easing is the adverse impact of potentially weak PLN on banks with high CHF-loans portfolio and then credit supply. Lagged cut would also help MinFin to cover high borrowing needs.
FX and Money Markets
The zloty should track the general CEE sentiment in April. NBP didn’t declare the size of its asset purchases, so far NBP bought PLN20bn out of PLN80bn we estimate Polish QE may reach. PLN outperformance vs CEE FX shows adverse impact on PLN is limited.
Domestic Debt and Rates
As of end of April lowering of the required reserve will free PLN40bn in balances of local banks. These are likely to fund purchases of POLGBs, likely in advance given overliquidity of the local interbank market. Additional PLN10.4bn will come from maturing PS0420 later this month. Therefore we expect a decline in yields of POLGBs across the curve in the remainder of April. Another 50bps of rate cuts is already priced in, as asset swaps should tighten as well.
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