We visited Warsaw on 28-29 January, meeting with private banks, the Ministry of Finance, the bankers' association, private companies and other officials. This document presents our key findings from the trip and the outlook for the zloty.
The Polish economy continues to do well and we raise our real 2016 GDP growth forecast to 3.8% (above consensus), from 3.5%. br>
The fiscal performance has been stronger than expected recently and, in our view, the targets for 2016 are achievable. However, we believe the deficit may exceed 3% of GDP in 2017 unless the government adopts new measures or scales back spending.
We expect the central bank mandate to remain intact but interest rates could be cut if the ECB cuts rates aggressively in March. The medium-term direction for interest rates is up.
On the Swiss franc loan conversion plan, we think the final plan will be more limited in size than feared, as the potential economic and fiscal ramifications outweigh political gains for the government.
The biggest risk to our forecast is political should relations with the EU deteriorate further and/or the government embark on new controversial policy measures. We think some time is needed for investors to gain confidence in the government before forcefully buying into Poland again.
In sum, we see EURPLN trading around current levels for the next three months due to the uncertain policy environment but then moving gradually towards 4.20 in the latter half of the year as the political risk premium abates.