Beating Germany Makes Poland Haven 20 Years After Relief: Riskless Return


Polish bonds beat German bunds and U.S. Treasuries in risk-adjusted returns since Europe’s debt crisis started three years ago, indicating the country that restructured a $35 billion debt load two decades ago is becoming a regional haven.

The BLOOMBERG RISKLESS RETURN RANKING shows the Bloomberg/EFFAS Poland Government Bond Index of local-currency returns increased the most among 25 countries in the three years through Feb. 6. The Polish gauge advanced 8.3 percent after taking into account price swings, compared with 4 percent for German bundsand 3 percent for U.S. Treasuries. Polish debt, ranked ninth in total return, had the second-lowest volatility after Japan.

Foreign investors boosted holdings of Polish bonds to a record last year, lured by yields of about 5.3 percent on average, more than double the rates in Germany and the U.S. Poland (POGDYOY), the only European Union nation to avoid a recession in 2009, is less vulnerable to bond market swings because pension funds are required to invest at least 95 percent of their assets locally. UniCredit SpA and KBC Asset Management say the rally will continue as Prime Minister Donald Tusk seeks to cut the budget gap by almost half.

“Investors are switching out of U.S. Treasuries and into Polish government bonds,” said Gyula Toth, a Vienna-based emerging-market strategist at UniCredit, Italy’s biggest bank. “This is a sort of eastern European safe haven. We are still pretty constructive.”

Debt Restructuring

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period of time, increasing the potential for unexpected losses compared with a security whose price moves at a steady rate.

Poland has topped the risk-adjusted returns of the countries tracked by the European Federation of Financial Analysts Societies and Bloomberg since the index was started at the end of 1999, and had the second-lowest volatility over that period, after Japan (JNGATR).

Poland restructured about $35 billion of loans in 1991 owed to the so-called Paris Club of creditor governments including the U.S. andGermany, after a stagnating economy and surging inflation during the previous decade made the government’s communist-era debt burden unsustainable.

Outpacing Germany

The country’s transition to a capitalist economy spurred average growth in gross domestic product of 4.4 percent during the past two decades, compared with 0.1 percent expansion during the 1980s, as the government sold state-run companies, boosted foreign-exchangereserves about 24-fold to $90 billion and tamed inflation.

Poland, which paid the final installment of its Paris Club debt in March 2009, plans to meet the fiscal criteria to adopt the euro by 2015, Finance Minister Jacek Rostowski told reporters in Brussels on Jan. 30.

The nation deserves an increase in its credit rating this year as economic growth helps boost investor confidence, Krzysztof Kalicki, the chief executive of Deutsche Bank AG’s local unit, said last month.

Poland’s local-currency debt is rated A2 by Moody’s Investors Service, the sixth-highest grade and on par with Italy. Standard & Poor’s and Fitch Ratings both have Poland at A, the sixth-highest rating. Germany boasts the highest-possible grade from all three ratings companies.

‘More Stable’

Poland’s combination of resilient economic growth and stable monetary policy has helped reduce swings in the country’s 502 billion zloty ($159 billion) bond market, according to David Hauner, the head of EEMEA economics and fixed-income strategy at Bank of America Merrill Lynch Global Research in London.

The EU’s biggest eastern economy maintained an annual expansion of at least 0.5 percent in every quarter during the depths of the global financial crisis in 2009. The euro zone shrank as much as 5.3 percent and the U.S. contracted by as much as 5 percent.

Poland’s gross domestic product increased 4.3 percent last year, the fastest pace since 2008, as companies increased investment and a weaker currency boosted exports, the government said on Jan. 27. Germany expanded 3 percent and U.S. GDP increased 1.7 percent, according to government reports.

“Poland has had positive growth numbers for a long time and it seems more stable than other” emerging economies in Europe, said Hakan Aksoy, who helps oversee about $4 billion as an emerging-markets and high-yield bond fund manager at Pioneer Investments in Dublin.

ECB Rates

Poland’s central bank, led by Governor Marek Belka, has kept its benchmark interest rate unchanged at 4.5 percent since June after raising it four times in the first half of last year, from a record-low of 3.5 percent.

By contrast, the European Central Bank (EURR002W) announced two interest-rate increases of 0.25 percentage point each in April and July, then reversed course and cut rates back to a record low in two steps at the end of last year. Brazil’s central bank, which raised its main rate five times between January and July of last year, has since cut borrowing costs four times.

In Poland, “you’ve had for a long time pretty steady expectations for the policy rate, which anchors the yield curve,” Bank of America’s Hauner said.

Forward contracts on Polish borrowing costs signal expectations that the rate may be unchanged during the next six months, according to data compiled by Bloomberg.

Record Holdings

Low volatility has lured bond investors to Poland at a time when slowing economic growth and rising debt burdens have roiled the bond markets of southern European countries including Greece, Portugal, Italy and Spain. Foreign investors lifted their holdings of Polish government bonds to 157 billion zloty in October, a record high, and held 152 billion zloty of the debt at the end of December, according to data compiled by the finance ministry.

Bond purchases by local pension funds have helped stabilize the market, said Ernest Pytlarczyk, chief economist at Warsaw- based BRE Bank SA, Poland’s third-biggest lender. Pension funds had about half of their 225 billion zloty under management in government bonds as of December, according to data compiled by the country’s financial regulator and the finance ministry.

While Poland’s economy has weathered Europe’s debt crisis so far, the country’s financial links to the region make it vulnerable to a retrenchment by foreign lenders, according to Pablo Cisilino, who helps manage about $30 billion in emerging- market debt at Stone Harbor Investment Partners in New York.

Currency Risk

About 63 percent of the total credit extended to non-bank borrowers in Poland as of June came from foreign lenders in the euro area, according to the Bank for International Settlements.

“Eastern Europe is most affected by the deleveraging of European banks,” said Cisilino, who has “underweight” holdings in Poland.

Currency swings may add to risks for investors outside Poland. The zloty weakened 11 percent against the euro last year and depreciated 14 percent against the dollar as the European debt crisis intensified. That wiped out last year’s 6.1 percent gain in the Bloomberg/EFFAS Poland Government Bond Index for investors in the U.S. and euro zone who sold the debt and exchanged the proceeds back into their home currencies.

The zloty has rallied 9.5 percent against the U.S. currency so far this year, and dollar-based returns from the Polish bond market are the third-biggest among 25 countries after Hungary and Ireland, according to data compiled by Bloomberg.

Bank Lending

Emerging-market currencies rallied after the ECB announced a three-year lending program for banks, the Federal Reserve said it will keep benchmark interest rates low through at least 2014 and reports showed a stronger U.S. labor market and slower Chinese inflation.

The ECB’s lending program has reduced “tail risks” for European markets, Agnes Belaisch, a former International Monetary Fund economist who helps manage about $2.5 billion in emerging-market debt at Threadneedle Asset Management in London, said in an e-mail. “Local currency bonds have become attractive again.”

Economic reforms by Prime Minister Tusk, the first Polish leader since the collapse of communism to win a second consecutive term, may help extend the rally in bonds, according to Dieter Van De Voorde, a fixed-income fund manager at KBC Asset Management in Luxembourg, which oversees about $209 billion.

‘Strong Government’

Tusk has raised employers’ disability contributions, announced plans to cut tax incentives and pledged to introduce a tax on metals extraction to narrow the budget deficit to within the EU limit of 3 percent of GDP this year from an estimated 5.6 percent in 2011. If the government meets its deficit target, the country may win a credit-rating upgrade next year, said BRE Bank’s Pytlarczyk.

Poland’s public debt was less than 54 percent of GDP at the end of last year, below the country’s legal ceiling of 55 percent, the finance ministry said on Dec. 30. The debt-to-GDP ratio in the euro area was about 88 percent in 2011, compared with 102 percent in the U.S., according to January estimates by the International Monetary Fund.

Polish debt is “still a nice pick,” said KBC’s Van De Voorde, who has “overweight” holdings of the bonds. “It’s a strong government.”

author: Michael Patterson, Christian Baumgaertel

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