Polish Political Turmoil Tests Renewed Investor Confidence

Wojciech Moskwa
·2 min read
1
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

(Bloomberg) -- The massive rally in Polish assets since October’s election is being tested by the return of political turmoil, which is eroding the country’s chances to quickly tap billions of euros in frozen European Union aid.

Most Read from Bloomberg

Since Prime Minister Donald Tusk’s alliance won the ballot, Poland’s investment case has been reinvigorated by expectations that the country will be returning to the European mainstream after eight years of divisive populist rule. The zloty has strengthened about 4% against the euro and 9% to the dollar since the election, while Warsaw’s WIG20 stock index has gained 16%, among the best performances across emerging markets.

But the rosy outlook, including hopes that Tusk would soon reverse changes to the justice system blocking EU aid, has taken a hit amid an unprecedented power struggle between the new government and President Andrzej Duda. The head of state is a loyalist of the former populist regime, wielding veto power over legislation needed to overhaul the courts.

“It is quickly becoming clear that political risk will reign supreme in Poland for the foreseeable future,” said Tatha Ghose, senior emerging-market economist at Commerzbank AG in London. “The FX market has not adequately priced the risks in.”

Largely Insulated

Polish assets have so far been largely insulated against the political turmoil, which has yet to translate into an immediate economic or financial hit. Under a deal with the EU, Tusk’s administration has roughly until the end of February to come up with a way to meet the conditions on judicial independence needed to free up nearly €60 billion ($65 billion) in aid.

The zloty traded 0.3% weaker to the euro on Thursday, in line with a retreat in other eastern European currencies. The WIG20 was little changed on the day.

Nevertheless, the rising political temperature in Warsaw could make positions in Polish assets more risky longer term. Parliamentary Speaker Szymon Holownia said the standoff with the populist opposition over the rule of law had thrust the country into a “deep constitutional crisis,” and market research firm Tellimer said on Wednesday that the Polish equity market wasn’t adequately reflecting such political risks.

The opposition will hold what’s expected to be its biggest public protest since the election later on Thursday. Two of its former lawmakers, who have been convicted of abuse of power, are on hunger strike in jail after the police raided Duda’s palace where they were hiding out.

“Rising political risks, with tensions between President Duda and the new government possibly complicating the adoption of legislative changes restoring the rule of law, may limit further zloty gains,” UniCredit analysts wrote in a research note. “Investors may stay on the sidelines until uncertainty settles.”

--With assistance from Maciej Martewicz.

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.