Bloomberg News

Best World Bonds Show No Repeat of 2008 on Growth: Poland Credit

October 20, 2011

Oct. 20 (Bloomberg) -- Better-than-forecast industrial output growth in Poland is helping extend the rally that has produced the biggest gains in bonds worldwide this quarter.

Production rose 7.7 percent in the 12 months to September, Poland’s central statistics office said yesterday, beating the median forecast of 5.2 percent from 22 economists surveyed by Bloomberg. The increase surprised analysts after business confidence fell the most in three years in Germany, Poland’s biggest export market, and sent the extra yield investors demand to hold 10-year Polish bonds over German bunds down seven basis points yesterday to 370, data compiled by Bloomberg show.

The last time Germany’s Ifo index slowed as much, Polish output slumped 12 percent from May 2008 to April 2009 and its yield spread over Germany rose 216 basis points to peak at 372 in October 2008, data compiled by Bloomberg show. This time, debt has been buoyed by domestic growth and pledges from re- elected Prime Minister Donald Tusk to cut the budget gap from a record. Polish debt returned 5.4 percent in dollar terms this month, the most among 26 indices tracked by the European Federation of Financial Analyst Societies and Bloomberg.

Poland “should come through better than other countries in the region despite the German slowdown,” said Jens Thellesen, who helps manage about $1.2 billion in emerging-market debt at Jyske Invest in Silkeborg, Denmark and has an “overweight” position on the zloty and is “market-weight” on zloty bonds. “The Polish economy is influenced by events in Germany, but it’s more closed than Hungary’s, for example.”

Beating Forecasts

Germany’s Ifo business climate index fell by 6 percent during the third quarter, its biggest decline since a 12 percent slide in the fourth quarter of 2008. Polish output growth beat economist forecasts for a second month after expanding 8.1 percent in August, triple the median economist estimate of 2.7 percent on Bloomberg.

Poland, the only economy in the European Union to avoid a recession through the global credit crisis, may grow 2.2 percent in 2012, according to European Bank for Reconstruction and Development forecasts. While the outlook is down from the bank’s July projection of 3.5 percent growth, it is quadruple the forecast of 0.5 percent for Hungary and 1.1 percent for Slovakia.

Poland’s slowdown is likely to be “shallow and short,” Andrzej Bratkowski, a member of the monetary policy council, said in an interview on Oct. 17.

Yield Spreads

The extra yield investors demand to hold Polish dollar- denominated bonds over U.S. Treasuries yesterday fell three basis points, or 0.03 percentage point, to 250, JPMorgan Chase & Co. indexes show.

The cost to insure Polish debt against non-payment for five years through credit-default swaps rose 6 basis points to 236, paring this month’s decline to 60 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Polish default swaps cost 74 basis points less than the average for countries in eastern Europe, the Middle East and Africa included in Markit iTraxx SovX CEEMEA Index, compared with a discount of 79 basis points a year ago.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The zloty traded 1.5 percent weaker against the euro at 4.4067 at 5:37 p.m. in Warsaw, paring its gains this month to 0.3 percent. The currency lost 10 percent to the euro in the third quarter, the most among the 177 currencies tracked by Bloomberg, while falling 17 percent against the dollar last quarter.

Australia, Hungary

The world-best 5.4 percent dollar-term return from Polish bonds is followed by a 5 percent gain on Australian notes and a 3.2 percent return from Hungary and New Zealand debt, according to data compiled by the European Federation of Financial Analyst Societies and Bloomberg. Polish debt was the world’s third-worst performer last quarter after Greece and Hungary with a decline of 15.7 percent, based on the average for bonds maturing in one year or more.

The EBRD’s forecast for Polish growth is below the government’s 4 percent projection for this year and next. Any slowdown will reduce budget revenue and make it difficult for Tusk to meet his goal of cutting the budget deficit to 2.9 percent of gross domestic product next year from 5.6 percent in 2011, said Paul McNamara, who helps manage $7 billion of emerging-market debt at GAM Investment Management in London.

“Poland’s in for a rough ride next year,” said McNamara, whose holdings include Polish bonds. “The budget situation is troublingly dependent on growth” and the target will be “very, very difficult without new measures,” he said in a phone interview.

Budget Finances

The International Monetary Fund said last month that Poland is likely to show the most significant improvement in budget finances of any country in eastern Europe next year.

“I don’t think anyone believes the Polish fiscal situation is out of control,” said Kieran Curtis, who helps manage $3.5 billion in emerging-market assets at Aviva Investors Ltd. in London. “With a decent policy mix, Poland could still be a reasonable outperformer. I can imagine us going overweight on Polish bonds if the government comes up with a credible deficit reduction plan.”

The bigger risk for Polish assets comes from Greece, according to Thellesen at Jyske. Euro-area leaders assembled in Frankfurt yesterday seeking to narrow divisions ahead of a summit to solve the sovereign debt crisis, while banks lobbied against forced recapitalization and deeper writedowns on Greek debt.

“If the euro-zone talks don’t lead anywhere, that will hurt Polish assets,” Thellesen said. “If Greece were to default, we’d see a flight to safety that would hit Poland badly.”

--With assistance from David McQuaid, Monika Rozlal and Piotr Skolimowski in Warsaw. Editors: Wojciech Moskwa, Stephen Kirkland

To contact the reporter on this story: Katya Andrusz at

To contact the editor responsible for this story: Gavin Serkin at

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