Poland’s strong economic growth requires structural reform to be sustained given potentially lower 2021-27 EU funding. Debate over linking future funding to Poland’s maintenance of the rule of law highlights governance concerns, says Scope Ratings.
A strong policy framework, including credible monetary and flexible exchange rate policies, has been central to Poland’s robust macroeconomic performance.
Real GDP growth averaged 3.6% a year during the past 10 years, a period also marked by low economic and financial volatility and reduced external risks. These factors support the country’s A+ rating, which Scope affirmed with a Stable Outlook on 20 July.
Also underpinning the economy, which expanded 5.2% YoY in Q1 2018, is investment growth. After resuming in 2H 2017, investment should remain buoyant this year and next, reflecting high EU budget transfers secured in the 2014-20 financing framework, low interest rates as well as favourable credit supply from Poland’s liquid, profitable and well-capitalised banking system.
“Longer term, Poland needs more structural reform to ensure sustainable, high growth as EU transfers potentially decline in the 2021-27 multiannual financial framework,” says Jakob Suwalski, Scope sovereign analyst on Poland.
Proposed cuts to EU cohesion and agricultural programmes could lead to a loss of 10-15% of EU funds in real terms over 2021-27, affecting Poland and other CEE countries. Poland received allocations of more than EUR 100bn in the 2014-20 EU framework. In addition, the European Commission’s proposal on a new mechanism linking restrictions to future EU funds to rule of law deficiencies will continue to be the subject of intense negotiations in the period ahead. While Poland will remain a major beneficiary of EU funds under all scenarios, the country faces other challenges, among them an ageing population and low savings rates, increasing its dependence on sustained capital inflows.
Uncertainty concerning the government’s ability to meet all challenges has grown as abrupt regulatory changes transform Poland’s economic landscape. Scope is monitoring closely reversals in Poland’s previously strong record of liberalisation, and evaluating risks surrounding EU sanctioning mechanisms tied to the rule of law. New domestic regulations, which came into force in April 2018, lowered the retirement age for Supreme Court judges to 65 years, forcing out judges and allowing the government to appoint new candidates of its choice.
“Scope views the tensions with the EU over the Article 7 procedure, and the weakening of the rule of law and judicial independence, with significant concern,” comments Suwalski.
However, presently, Scope expects Poland to navigate the current diplomatic disagreements without material impacts on the economy or debt sustainability outlook.
“Still, to secure future investment, the government needs to maintain a stable, predictable policy and regulatory environment—the backbone of Poland’s recent economic success,” concludes Suwalski.
Click here for Scope’s latest sovereign rating announcement on Poland.
ECB still in wait-and-see mode as yields rise
FRANKFURT (Reuters) – The European Central Bank is monitoring the recent surge in government borrowing costs but will not target specific levels in bond yields or mechanically react to market moves, two ECB policymakers said on Friday.
Government bond yields around the world have rebounded from some of their lowest levels in history in recent weeks, mostly reflecting expectations of faster price growth in the United States.
Investors have been pondering at what point the ECB will increase the pace of its bond purchases to rein in yields, in keeping with its pledge to maintain financing conditions favourable for pandemic-stricken governments, companies and households.
Verbal intervention by ECB President Christine Lagarde last week failed to stem the bond selloff. Then Chief Economist Philip Lane’s and fellow board member Isabel Schnabel tried to calm investor nerves. But both inserted caveats in their messages.
“At this stage, an excessive tightening in yields would be inconsistent with fighting the pandemic shock to the inflation path,” Lane said in an interview with ExpansiÃ³n.
“But at the same time, it is crystal clear that we are not engaged in yield curve control, in the sense that we want to keep a particular yield constant”.
Lane added that while inflation was indeed recovering, the increase was not yet what the ECB was looking for after a decade of undershooting its target.
Ten-year Bund yields, a key benchmark for the 19-country euro zone, now yield -0.223%, up from around -0.60% at the start of the year.
Schnabel reaffirmed that higher long-term real yields, which are adjusted for inflation, in the early part of an economic recovery could choke growth and would warrant a reaction by the ECB.
But she said a gradual rise in bond yields would even be welcome if it reflected higher inflation expectations, showing the ECB’s stimulus is working.
“For example, a rise in nominal yields that reflects an increase in inflation expectations is a welcome sign that the policy measures are bearing fruit,” Schnabel said.
“Even gradual increases in real yields may not necessarily be a cause of concern if they reflect improving growth prospects.”
(Reporting by Balazs Koranyi and Francesco Canepa; editing by Shri Navaratnam, Ana Nicolaci da Costa, Larry King)
European shares drop as bond rout sparks profit taking
By Shashank Nayar
(Reuters) – European stocks fell on Friday as investors booked profits in high-flying technology shares due to concerns over rising inflation and interest rates on the back of a jump in bond yields.
The benchmark European stock index was down 0.6%, paring earlier losses but still on track to record its first weekly fall this month. London’s FTSE 100 slipped 0.2% and Germany’s DAX lost 0.1%, both well off session lows.
“Equity markets across the U.S. and Europe are quite expensive now and with bond yields constantly rising, the fixed income market is proving to be more attractive than the riskier equity market,” said Roland Kaloyan, a strategist at SocGen.
“Investors are actually looking at the pace at which yields drop and the current speed is quite concerning for equity markets.”
Asian markets fell to a one-month low, while the dollar rose from a three-year trough as the 10-year U.S. Treasury yield hit a one-year high, sparking fears the heavy losses could trigger distressed selling in other assets. [MKTS/GLOB] [FRX/]
Euro zone government bond yields, however, stabilised on Friday, although Germany’s benchmark yield was still headed for its biggest monthly jump since 2016.
Technology stocks bore the brunt of this week’s sell-off after powering the global stock market recovery last year as assurances from European Central Bank chief Christine Lagarde and other policymakers failed to stem the rise in yields.
Still, the benchmark STOXX was tracking its best monthly gain since November, helped by a rotation into energy, banking and mining stocks on expectations of a pickup in business activity following vaccine rollouts.
Better-than-expected fourth-quarter earnings have also reinforced optimism about a quicker corporate rebound this year. Of the 194 companies in the STOXX 600 that have reported quarterly earnings so far, 68% have beaten analysts’ estimates, according to Refinitiv.
“As recovery hopes gain ground with the economy re-opening and vaccines coming up, coupled with earnings being relatively positive, the near-to-mid-term outlook for equities seems positive with yield movements still a part of the equation,” said Keith Temperton, an equity sales trader at Forte Securities.
Germany’s Deutsche Telekom gained 0.3% after it reported forecast-beating fourth-quarter results as its merged U.S. unit T-Mobile continued to drive growth.
British Airways-owner IAG gained 3.2% even after it recorded a 7.43 billion euro ($9 billion) loss last year and warned it could not say when normal flying conditions would return.
(Reporting by Sagarika Jaisinghani in Bengaluru; Editing by Sriraj Kalluvila)
Bond markets left smarting from worst rout in years as reflation goes global
By Dhara Ranasinghe
LONDON (Reuters) – From the United States to Germany and Australia, government borrowing costs on Friday were set to end February with their biggest monthly rises in years as expectations for a post-pandemic ignition of inflation gained a life of their own.
Australia’s 10-year bond yield and Britain’s 30-year yields were set for their biggest monthly jump since the 2009 global financial crisis. Long-dated New Zealand yields were flirting with their biggest monthly surge since 1994.
The move, which began in the U.S. Treasury market at the start of the year on prospects for a huge fiscal boost and economic recovery, has spread globally.
Even after a Friday respite from this week’s brutal drubbing, Australia’s 10-year yield is up 70 basis points in February and New Zealand’s 10-year yield is up almost 77 bps.
(Graphic: Australia’s 10-year bond yield set for biggest monthly rise since 2009: https://fingfx.thomsonreuters.com/gfx/mkt/xklpyoogmpg/AU2602.png)
Australia’s 10-year bond yield has soared almost 40 bps this week alone to 1.8%, its biggest weekly jump since 2013 .
And as three-year bond yields moved above their 0.1% target, the Reserve Bank of Australia on Friday made an unscheduled offer to buy A$3 billion ($2.35 billion) of three-year bonds, on top of a similar amount on Thursday, to calm markets.
“Given how expensive bonds have been, meaning yields have been depressed, it was expected that when the selloff came it would move at great speed,” said Seema Shah, chief strategist at Principal Global Investors.
“This is a move driven by the U.S. and that has fed out to other markets, but large elements of the selloff in recent days are not just about the improvement in growth fundamentals but technical factors, too.”
(Graphic: Monthly change in bond yields: US, UK, Germany: https://fingfx.thomsonreuters.com/gfx/mkt/dgkplzzwepb/febyields2602.png)
For the United States and some European markets, the bond selloff was on the scale of late 2016, when Donald Trump’s election as U.S. President last triggered so-called reflation bets.
U.S. 10-year bond yields, up more than 35 bps this month and near one-year highs above 1.45%, are set for their biggest monthly jump since November 2016.
Britain’s 10-year bond yield, up 45 bps in February, was also set for its biggest monthly jump since 2016. Thirty-year yields headed for their biggest monthly leap since 2009 after rising 48 bps.
Rising government bond yields pose a challenge for central banks trying to steer economies through the COVID-19 crisis. They feed through to the real economy by raising the rates at which banks lend and consumers borrow, thereby tightening financial conditions.
Japan, which targets long-dated bond yields at around 0%, has seen 10-year yields rise almost 10 bps this month to 0.15%. That puts it on track for the biggest monthly gain since March 2020, the peak of the COVID-19-induced market turmoil.
In the euro area, where German Bund yields were set for their biggest monthly jump in three years, the European Central Bank has said it is monitoring the rise in rates closely.
“Seen from a fundamental angle, the ultra-low yields of 2020 made much less sense than the less depressed yields to which markets are heading now,” said Berenberg chief economist Holger Schmieding.
Schmieding said 10-year U.S. yields were likely to rise to 2% by the end of the year as investors price in strong growth and a rebound in underlying inflation. German Bund yields could reach 0%, “with risks tilted to the upside.”
(Graphic: Where will bond yields end this year?: https://fingfx.thomsonreuters.com/gfx/mkt/qmyvmwwgwvr/DEUS2602.png)
(Reporting by Dhara Ranasinghe; Editing by Tommy Wilkes and Larry King)
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