Poland Premium

Autocracy, democracy and now “twinocracy”. Following the resignation last Friday of Kazimierz Marcinkiewicz, Jaroslaw Kaczynski will become Poland’s new prime minister. His twin brother, Lech, is the country’s president, opening the way for a new entry in the political lexicon. Etymological excitement aside, however, financial markets have taken the prospect of a more populist and potentially less fiscally prudent government in their stride.

The sanguine response in Polish currency and equity markets can be partly explained by the swift reassurances offered by the new prime minister and his promotion of Stanislaw Kluza from his current position as deputy finance minister. Mr Kluza has stated his commitment to existing budget deficit targets and meeting the conditions for eurozone entry by 2009. Still, in the medium term there is a risk of looser fiscal policy. May’s cabinet reshuffle gave important positions to the more populist members of Poland’s coalition and the government has approved a large rise in healthcare sector wages.

For now, investors seem willing to discount these concerns. This is partly because they seem remote, but also because events outside Poland rather than domestic issues have determined the recent direction of its financial markets. During May and June’s market turmoil the Polish zloty depreciated by 7.6 per cent, almost as much as the Hungarian forint’s 9.3 per cent decline, despite Poland’s far smaller current account deficit. The zloty has been highly correlated with domestic and global equity markets. The impact of last month’s volatility was also compounded by the 15 per cent weighting of copper company KGHM in Poland’s WIG20 index.

Copper and equity prices have bounced strongly from their mid-June lows, as investors have regained some risk appetite. While global conditions favour Polish markets, domestic political problems will fade into the background. But, should volatility return, politics will be used as the excuse to sell.

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