BZ WBK MACROscope - Give PiS a chance
In November's MACROscope:
- The conservative Law and Justice party (PiS) won the general elections with an outright majority in both houses of the parliament, which means it is able to form a government without a coalition partner. Two PiS nominations for economic positions in the cabinet should be perceived by the market as at least neutral, and potentially confidence-building, as the names are well known: Mateusz Morawiecki, now Development Minister and Deputy PM responsible for economic affairs, is ex-CEO of Bank Zachodni WBK and was a member of the Economic Council to the Prime Minister in 2010-12; Finance Minister Paweł Szałamacha was Deputy Treasury Minister in 2005-07, responsible for the financial sector, and a co-founder and CEO of the Sobieski Institute think tank.
- The new government led by Prime Minister Beata Szydło will most likely be formed by the end of November. The new PM's inaugural speech will be key to assessing PiS' fiscal programme. We see a risk of an expansionary policy mix. On the fiscal front, if the government starts to deliver its key election promises (even only partly) and if tax collection falls short of the party's ambitious assumptions, we think the deficit could rise, at least temporarily. That said, we note that the candidate for finance minister has emphasised the importance of a 3% budget deficit ceiling.
- As regards monetary policy, PiS has said there is still room to cut interest rates and that willingness to do so will be among the criteria used to choose candidates to join the central bank's Monetary Policy Council (MPC). We believe interest rates are indeed likely to be cut by 50bp at the start of 2016. Inflation will probably be above zero by then and trending upwards, while GDP growth should hold steady above 3% (supported by solid growth of investments, consumption and exports). Thus, if the new MPC wanted to trim borrowing costs, the best strategy would probably be to do it as soon as possible, so that it does not give the impression that it is a pro-cyclical move. By the time the February MPC meeting takes place, there Council will have five new members. Additionally, two current members, who were designated by PiS, have turned noticeably more dovish in recent months. One of them suggested that March might be an appropriate moment to consider an adjustment. The FRA market is pricing in a 50bp cut over a slightly longer horizon.
- Such a scenario supports our forecast of a steeper yield curve in 2016. The main risk for the zloty is connected to the issue of converting FX loans and any ideas to amend the central bank's (NBP) charter. As we do not think those will be top priorities for the cabinet, we think that global factors will dominate and should support the zloty. For 2016, we see a risk of a higher EUR/PLN, as the new government might start implementing some of its more controversial policy measures.
POLAND MACROSCOPE NOVEMBER 2015
BZ WBK Economic Analysis Department