Polish zloty resisting the Ukraine crisis

<p>Polish zloty shielded by German juggernaut Poland’s high exposure to German imports has enabled it to leverage off Germany’s broad recovery. Polish exports to Germany […]</p>

Polish zloty shielded by German juggernaut

Poland’s high exposure to German imports has enabled it to leverage off Germany’s broad recovery. Polish exports to Germany account for 6% of GDP, three times the amount of exports to the UK, its 2nd largest export destination. The continued improvement in Poland’s balance of payment and capital flows position will be crucial in withstanding political and economic backdrafts in the region.

Polish official reserves have hovered near $102 billion, which is just below the $112 bn record high reached in April 2011.  The current account balance has improved to -1.85% of GDP in Q3 2013 from as low as -6.6% of GDP in Q4 2008. With German business and investment confidence attaining multi-year highs, the demand factor has certainly helped in Poland. As long as Germany’s supply side strength continues to translate into solid external demand without any dampening effect from the strong euro, Poland’s resilience in the face of the Black Sea volatility will likely persist.

Most remarkably, Poland’s low exposure to China (exports to China are less than 0.3% of GDP) shield the economy from the growing concerns in China’s credit dynamics as well as as any potential repercussions on emerging market exports.

USDPLN pushed towards a key technical level of 3.0, coinciding with the 100-month moving average. Since May 2013– when emerging markets first began their sell-off (following the Wall St Journal’s article on tapering), the zloty has risen 12% against the USD. The 2.97 PLN resistance (support for USDPLN) will likely prove a stubborn obstacle for PLN bulls in the medium term before but the longer term dynamics argue for a constructive picture towards 2.76.

Ukraine risks debt default

Ukraine will remain mostly Russia’s problem as far as economics are concerned. It will be in Russia’s interest to eventually lead a global bail-out program of the Ukraine as it remains Russia’s biggest gas export market.

The fact that the Ukraine is not part of any major economic union as was the case of Greece in the Eurozone means that no group of nations, such as the EU or IMF will be dragged down by a single member –nor will they be forced to spend massive resources to bail it out.

Ukraine owes more than $9 billion in debt payments this year—30% of which is due by end of Summer– while its non-gold reserves have plunged to an 8-year low of $16 bn, from the $38 bn high in 2011. Speculating against the Ukranian hryvnia is exactly that, and not as in the case of Greece—speculating against the entire euro currency. The UAH is down 19% year-to-date at $USD 9.75. The currency pared half of the losses, which were mainly incurred in February. Meanwhile, the Swiss franc is hovering near 28-month highs against the USD on broadening safe-haven flows.

The combination of massive capital outflows, US hesitancy over Ukraine loan assistance and the potential imposition of debt repayments by Russia could sink the country into outright default. The IMF, which has not yet concluded its fact-finding mission in Kiev, estimates it will have to fork well over the $15 billion requested by the Ukraine. But how much of that will be claimed by Moscow is a question for a later day.

Russia may be in recession

Russia’s economy risks hitting recession in 2014 as the political repercussions in the Ukraine forced a sharp deterioration in the nation’s external finances. Capital outflows are estimated to have reached $70 in Q1 prompting a 15% plunge in Moscow’s stock market so far this year and pushing currency reserves to reach 3-year lows at $457 billion.  As of Q3 2013, Russia’s current account surplus slid to 1.8% of GDP, the lowest level since the 1998 crisis. It may not be long before the balance slips back into the red.

Shrugging the macro slowdown, Russia’s central bank was forced to raise rates by 150-bps this year in order to support the depreciating ruble. RUB fell to 5-year lows against the USD, and is now vulnerable to further weakness below $USD 37.00.

Poland Russia Ukraine exports currency reserves & current account balance


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