Poland's economic outlook: PLN is up 2% YTD - BBH

Analysts at Brown Brothers Harriman offered an investment outlook for Poland.

Key Quotes:

"The zloty has done better after a poor 2016.  In 2016, PLN fell -3.3% vs. EUR and was barely ahead of the worst ARS (-18% vs. USD), TRY (-17%), MXN (-16%), and CNY (-6.5%).  So far in 2017, PLN is up 2% YTD and is one of the better EM performers. Our EM FX model shows the zloty to have WEAK fundamentals, so this year’s outperformance is likely to ebb.

EUR/PLN has fully retraced the post-election rise and made new cycle lows before stalling out. Using the December-February drop, the major retracement objectives come in near 4.3625 (38%), 4.3900 (50%), and 4.4175 (62%). The 200-day MA comes in near 4.3565.  

Polish equities have also done better after a weak 2016.  In 2016, MSCI Poland was up 1% vs. 7% for MSCI EM.  So far this year, MSCI Poland is up 14% YTD and compares to 9% YTD for MSCI EM. This outperformance should continue, as our EM Equity model has Poland at a VERY OVERWEIGHT position.  

Polish bonds have underperformed recently.  The yield on 10-year local currency government bonds is +8 bp YTD, which is one of the weaker performances in EM. With inflation likely to continue rising and the central bank likely to tilt more hawkish, we think Polish bonds will continue underperforming.  

Our own sovereign ratings model shows Poland’s implied rating at BBB/Baa2/BBB.  As such, our model still suggests downgrade risks to actual ratings of BBB+/A2/A-. We believe S&P’s initial cut to BBB+ last year was just the first of several to come. Indeed, Moody’s moved the outlook on its A2 rating last year from stable to negative."