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Poland plans to “radically” reduce its sale of bonds denominated in foreign currencies next year after a record 2012, as the country enjoys strong demand for domestic debt among international investors.
The government has already obtained about 75 percent of its 2013 foreign currency financing needs amounting to 6.5 billion euros ($8.5 billion), Deputy Finance Minister Wojciech Kowalczyk said in an interview today. Poland will also borrow more than 2 billion euros from the European Investment Bank and the World Bank in 2013 because of “better” conditions than on the market, he said.
The European Union’s largest eastern member sold $12.1 billion of bonds in euros, dollars, Swiss francs and yen this year, the second-biggest amount among emerging-market governments after China, to take advantage of record-low yields, according to data compiled by Bloomberg. International investors’ holdings of zloty-denominated sovereign bonds rose to a record this year as the government pledged to narrow the budget deficit and on prospects for interest-rate cuts.
“Just a few years ago, most international investors were interested in our foreign-currency bonds,” Kowalczyk, in charge of public debt management, said from his Warsaw office. “This has now changed and we see tremendous interest in zloty bonds.”
The additional yield on Poland’s dollar bonds over U.S. Treasuries tumbled 186 basis points this year to 124 at 2:54 p.m. in Warsaw, according to indexes compiled by JPMorgan Chase & Co. The yield on Poland’s 2020 euro-denominated note fell to a record low of 2.19 percent, data compiled by Bloomberg show.
“Because of the accumulated amount of foreign currencies we hold, we expect foreign bond issues in 2013 to be radically lower than this year,” said Kowalczyk, who joined the ministry in August after working for lenders including Citigroup Inc.’s Polish unit and at Merrill Lynch & Co. in London.
Foreign investors held 186 billion zloty ($58.9 billion) of zloty-denominated notes at the end of October, or 35 percent of the total, and up from 152.5 billion zloty at the end of last year, according to the Finance Ministry’s website.
U.S. investors account for about half of foreign-held domestic bonds and there is a “strong” interest from German pension funds, Kowalczyk said. The ministry also sees rising interest in bonds from foreign central banks and is trying to lure investors from Asia and the Middle East, he said.
Foreign investors view Poland as a “regional safe haven” because of its “prudent” debt management and “credible” fiscal policy, Jaime Reusche and Bart Oosterveld, analysts at Moody’s Investors Service in New York, said in a report on Nov. 27. The government plans to cut the budget deficit to 3.5 percent of economic output this year from 7.9 percent in 2010. The economy was the EU’s only one to avoid recession since 2008 debt crisis.
“Poland’s growth compared with other countries is key for foreign investors,” Kowalczyk said.
While Poland’s $514.5 billion economy continues to expand, it’s also feeling the impact of the recession in the euro region, the country’s biggest export market. Growth slowed to an annual rate of 1.4 percent in the third quarter, the weakest pace in more than three years. The central bank yesterday cut interest rates for a second month and said it can’t “afford a pause” in easing monetary policy.
Kowalczyk said economic growth of around 2 percent isn’t “ruled out” next year, compared with 2.2 percent projected in the budget draft. It was “too early” to talk about changes in the budget assumptions for 2013, he said.
“We are betting on a scenario that German economy will bounce back in the second half of next year,” Kowalczyk said.
The Finance Ministry has obtained around a fifth of next year’s borrowing needs and its cash reserves exceeded 58 billion zloty at Nov. 30, as the country seeks to insure again the risk of deterioration in the euro region’s debt crisis.
The government currently earns more by depositing that cash than it would cost to raise those funds on the market as “a lot of” rate cuts have already been discounted, Kowalczyk said.
The expectations for monetary easing don’t have to translate into a weaker zloty as the currency is supported by a narrowing current account deficit and foreign inflows into the debt market, he said.
Poland’s government has sent to parliament new rules curbing the impact of “speculative” currency swings on its year-end public debt calculations, Kowalczyk said.
The Finance Ministry will continue to use the exchange rate from the last working day of the year to determine the country’s public debt level in zloty terms for the year. At the same time, it plans to apply average annual exchange rates and subtract funds gathered for the following year’s budget from its debt stock to work out whether the country has stayed below public debt levels that would trigger austerity under Polish law.
Thirty-one percent of Poland’s debt is in foreign currencies, data compiled by Bloomberg show. Debt topping 55 percent of economic output would force the government to raise taxes, according to public finance law. It stood at 53.5 percent of economic output at the end of 2011 and will be “well below” the threshold this year, Kowalczyk said.
“We want to avoid a situation in which a significant move in the currency on the last day of the month will force us to drastically cut spending,” Kowalczyk said. “The debt itself will continue to be calculated and reported as before.”
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