Poland begins to shed emerging market status

Undeterred by Warsaw's refusal to give a euro entry target date, foreign investors increasingly group Poland together with smaller western European markets instead of higher risk emerging economies.

The pressure to align policy with European Union guidelines, along with a low inflation rate, low interest rates and a healthy current account makes Poland more akin to Scandinavian markets than, for example, Turkey, analysts say.

"The Polish market increasingly resembles those in Denmark or Norway, well-developed countries outside of the euro area," said Tomasz Stadnik, emerging market debt portfolio manager at Credit Suisse in London.

When Poland and nine other mainly ex-communist nations joined the EU in 2004, their main appeal was the prospect that within years they would adopt the bloc's common currency .

Investors wagered billions of euros in "convergence trades" seeing euro entry as a guarantee bond prices would rise as interest rates converged with those in the euro zone before entry.

Over the past two years or so investors have been gradually unwinding those trades as slow progress in reducing fiscal deficits made most governments push back and eventually abandon their target dates for euro membership.

Now, of the larger EU newcomers, only Slovakia has kept its euro adoption goal, aiming to join in 2009.

Narrowing spreads:

Yet despite the setbacks, the spread between five-year Polish and German government bonds rates are now only half a percentage point higher than in the euro zone.

Czech bonds have recorded similar gains as investors shifted their focus to countries with solid economic performance.

Growth in both well outstrips the euro zone, meaning each year the wealth gap dividing the "new" and "old" EU narrows. Exports are buoyant and directed mainly at EU markets, upping trade and economic integration with the rest of the bloc.

"The Czech example shows that you can have low interest rates without joining the euro," said Mateusz Szczurek, chief economist at ING Bank Slaski in Poland. "Convergence can proceed even without euro zone entry, it may just be less spectacular."

Most research teams at international banks still lump Poland, the Czech Republic and Hungary together with Turkey, Israel or South Africa, but analysts say the profile of investors has already changed substantially.

"A certain type of customer has already left, because they expect higher returns," said Jacek Wisniewski, chief economist at Raiffeisen Bank in Poland. "We don't see so many speculators anymore, instead western European pension funds are coming."

More stable:

Despite turbulent and confusing politics, the region's markets have been relatively calm and stable and so has its economic performance.

"Each year Poland is becoming a more mature country," said Mateusz Szczurek, chief economist at ING Bank Slaski. "Monetary and fiscal policy are fairly predictable and inflation is low."

Polish inflation was among the lowest in the EU last year, growth hit a nine-year high of 5.8 percent, and its fiscal deficit has fallen steadily, albeit not as fast as Brussels recommends.

Polish benchmark five-year yields are around 4.85 percent, close to Norwegian levels. Its market, valued at around 318 billion zloty ($106.9 billion), is three times as big as Norway and just under half the size of euro zone member Greece's.

Other countries in the region don't have the same appeal as Poland, either because they are much smaller or, as in the case of Hungary, they don't offer investors the same level of stability and policy credibility.

But even though Poland or the Czech Republic share many traits with more mature European economies, they have yet to decouple themselves from emerging markets' gyrations.

"Recent emerging markets sell-offs did have an impact on our market," says Szczurek. "We are still left with one foot in that universe."

Source:turkishdailynews.com.tr