BZ WBK MACROscope July-August 2015 - Never ending story
In July-August's MACROscope:
- After 17 hours of negotiations, European leaders announced they had reached an agreement with Greece on Monday. The initial market reaction was positive and the Polish zloty and government bonds gained. However, the situation is far from being entirely clear, as there are still many hurdles to overcome in order to confirm that Grexit is avoided. The Greek parliament has two or three days to accepta package of bills (VAT hike, pension reform, antimonopoly law). This is a precondition for the Eurogroup to accept the bailout for Greece worth €82-86bn. Additionally, there will have to be a transfer of public assets worth €50bn to a dedicated fund and proceeds from privatisation will be partly spent to reduce Greek debt. Therefore, in mid-July we will see the next steps by Greek and Euro zone politicians (including votes in some European national parliaments) and within the next couple of months we will see if the agreement is kept (with new Greek laws coming into force).
- This means there is still uncertainty as regards Greece’s fate in the Euro zone and it is unlikely to disappear soon. On the next two pages we explain seven questions about Greece. In our opinion, a strong message was sent by European politicians: they would like to avoid Grexit (for now). In the short term, this supports a risk-on strategy in financial markets and, if there are no negative surprises after voting in the national parliaments, we should see an even stronger zloty and tighter spreads of Polish bonds over Bunds. However, as the Greek saga is likely to (temporarily?) recede into the background, a number of other factors will play a role: economic recovery, local political risk, Federal Reserve policy and the risk of market turmoil in China.
- The Polish economy is still on the same course and if we exclude statistical noise (eg the impact of changes in working days), we see activity accelerating consistently and we expect this trend to continue. We maintain our forecast of 2015E GDP expansion of 3.8%, with growth likely to approach 4% in 4Q15E. The median market forecast is gradually converging towards our predictions. Economic growth in Europe continues to foster a positive environment for Polish exporters, especially when the exchange rate remains at highly competitive level. Together with inflation bottoming out, this scenario speaks in favour of higher yields.
- The short end of the curve is no longer pricing in any rate hikes in 2016. There is still much uncertainty about the composition of the new Monetary Policy Council (MPC) next year and the main opposition party (which is leading the polls ahead of an autumn general election) suggests it would prefer central bank policy to stimulate growth. As regards fiscal policy, there is an abundance of pre-election promises (details on page 7). It is hard to say to what extent these would materialise, but a combination of expansionary monetary and fiscal policy would favour a steeper curve.