May 26, 2016 / 8:00 AM / 4 years ago

Poland's markets losing lustre as Hungary's star shines

* Polish/Hungary stock market divergence widest on record

* Zloty is eastern Europe’s worst currency performer

* Analysts say politics is driving reversals of fortune

By Marc Jones

LONDON, May 26 (Reuters) - Poland’s image as eastern Europe’s flagship economy is fast being eroded by a more unorthodox mix of policies that the Warsaw government would argue has helped to turn nearby Hungary into a star performer.

Budapest, which regained its coveted ‘investment grade’ rating last Friday, appears to have swapped places in investors’ affections with Poland as Warsaw takes a route one analyst has termed an ‘Orbanisation’ of the country’s politics.

The term refers to Viktor Orban, Hungary’s outspoken prime minister, whose centralisation of power, increases in state spending and moves to make banks rather than borrowers swallow Swiss franc mortgage losses are now being emulated by Poland’s new ruling party, the nationalist-minded Law and Justice (PiS).

But markets are finding the convergence in style hard to compute. Whereas Hungary’s stocks have soared 70 percent and its local bonds have surged in the last two years, Warsaw’s have been hammered since it started veering in a similar direction.

Some say it might be an issue of timing. It took more than three years for the ‘Orbanomics’ rally in Hungary’s markets to kick in, but investors don’t seem willing to allow Poland time.

Stocks in Warsaw are down more than 20 percent since the start of 2015, S&P has cut its credit rating and the zloty has been central Europe’s worst currency performer, down 8 percent versus the euro over the last year.

“The issue is politics, politics and politics,” said Crédit Agricole senior emerging market strategist Guillaume Tresca.

“Poland used to trade like a safe-haven and Hungary was like a high-beta. Now it is a bit different, Hungary is a bit less high-beta and Poland has lost some of its safe-haven premium.”

Capping it all, Poland local currency bond yields briefly broke above Hungary’s for the first time last month and their default issurance costs are inching towards each other.

Warsaw’s political shift has also prompted a clash with the European Commission, which is now investigating changes in the way Polish judges are selected. Brussels has threatened to pursue a procedure which could ultimately strip Poland of its EU voting rights - something never done before.


With all that to be resolved, the only question for traders is whether Poland’s markets will continue their underperformance or whether they will achieve some of Hungary’s swagger.

Tatha Ghose at Commerzbank, who used the ‘Orbanisation’ term, reckons not, questioning whether copycat moves such as relieving mortgage holders of their Swiss franc worries will give Polish markets the same sort of uplift.

Data from the International Monetary Fund, which has warned the FX plan could destabilise Polish banks, shows hard currency mortgages were worth more than 10 percent of Hungary’s annual economic output (GDP) when Budapest forced banks in late 2014 to swallow losses linked to converting them into forints. In Poland, the share is less than 8 percent.

“Casual observers often draw a parallel between Hungary and Poland and assume that the implication for asset market performance is obvious,” Ghose said. “In reality, Hungarian asset prices performed the opposite way.”

Budapest’s push to become more self-sufficient also slashed its foreign currency debt to 80 percent of GDP from around 120 percent in 2010.

Its overall debt-to-GDP ratio is also forecast to drop, an improvement Poland will not see any time soon. It plans to increase budget spending this year by about 7 percent.

Also unique for Hungary was its big break in January 2015 when Budapest, having just converted the last Swiss franc mortgages into forints, escaped the fallout of the franc surge when Switzerland scrapped its exchange rate cap. Poland is only now looking to make its move.

“The Hungarian government and central bank were hailed as geniuses,” Ghose said, noting that as Hungary’s economic data improved, so did the risk premium investors demanded of it.


Hungary seems to still have the momentum. Its rating upgrade last Friday made it the first emerging economy to make the leap to investment grade in two years. Poland on the other hand suffered its first downgrade in January since the fall of communism in 1989.

S&P’s global chief rating officer Moritz Kraemer says risks are to the downside for his rating on Poland, which is now three notches above junk at BBB+.

“There is a risk Poland gets downgraded,” said Allianz Global Investors portfolio manager Shahzad Hasan, who has an overweight position on Hungary and underweight on Poland. “That (risk) is not negligible in the foreseeable future.”

A longer-term worry is that PiS seems to be tightening its control of Poland’s judiciary and media. That is straight from the ‘Orbanonmics’ playbook, but with the EU chiding Warsaw after a decade as eastern Europe’s economic poster child, investors are souring.

“Suddenly investors are having to take political risk (in Poland) into account that they haven’t had to over the last eight years,” said Rabobank economist Piotr Matys.

Reporting by Marc Jones; Editing by Gareth Jones

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