Poland election surprise spurs investor hope

Marc Jones, Reuters

Investors were quick to give a confident thumbs-up to Poland’s Europhile opposition bloc’s surprise election triumph as it fuelled hopes of better ties with Brussels and those that hold its purse strings. Official results confirmed that Poland’s ruling Law and Justice (PiS) party won most votes in Sunday’s ballot but fell short of a majority, confirming that the liberal, pro-EU opposition is on track to form the next government.
The result would pivotally change Warsaw, which has fought with the European Union over the rule of law, media freedom, migration and LGBT rights since the current conservative nationalist Law and Justice (PiS) government came to power in 2015. The zloty and Warsaw’s stock market — which has underperformed the rest of Europe by some 30% during PiS rule — both extended gains for a second straight session on Tuesday as former European Council president Donald Tusk looked to be in pole position to be Poland’s next leader.

As Europe’s sixth-largest economy, a revitalised pro-EU attitude in Poland would be particularly welcome. “It will be a positive development for sure because it will unlock the (EU) money that has been withheld and reduce a lot of the tension that has been created with Brussels,” said Daniel Moreno, head of emerging markets debt at investment firm Mirabaud.

Some 110 billion euros ($116 billion) earmarked for Poland from the EU’s long-term budget and the post-pandemic Recovery and Resilience Facility (RRF) remain frozen due to PiS’ record of undercutting liberal democratic rules.

“It would be one less headache for Brussels as well,” Moreno added, referring to the criticism the EU receives from the likes of Hungary’s Viktor Orban and last month’s election win in Slovakia for the nationalist Robert Fico. The 66-year old Tusk and his pro-EU coalition allies may still have to wait weeks or even months though before getting a turn at forming a government. Polish President Andrzej Duda, a PiS ally, has said he would give the first shot at forming a government to the party with the most votes, which as it stands is PiS.

However, with PiS’ only obvious coalition partner the far-right Confederation unlikely to secure enough votes for an overall majority, Tusk should get his chance. Veteran analysts were keen to stress, though, that even then it will not necessarily be plain sailing. Tusk will not instantly unlock the 35 billion euros in post-pandemic grants and loans that Brussels froze in May 2021 due to concerns about political influence over top judges.
Duda has referred the issue at the heart of that row to Poland’s Constitutional Tribunal in Poland. But like all the country’s institutions with a PiS leaning, it could be “quite obstructive”, abrdn portfolio manager Viktor Szabo said.

The other big question he and others have is what now happens to the big spending promises that both Tusk’s coalition and the PiS had campaigned on. Ahead of Sunday’s election, rating agency Fitch was forecasting a whopping 5.3% budget deficit this year. Poland still has a sub 60% debt-to-GDP ratio but already had to triple what it had previously paid investors when it sold a 10-year bond in its local zloty markets at 6% at the end of last year.

Daniel Wood, an emerging markets debt portfolio manager at William Blair Investment Management, said he expected Poland would focus potential additional bond sales on domestic markets in the next couple of years. “Poland’s debt stock is quite low, compared to some other countries in the region. There is some space,” Wood said. The central bank, though, has slashed interest rates at its last two meetings as the election campaign burst into life.

Szabo questioned whether that would continue under a new government, especially with the bank’s governor, Adam Glapinski, originally installed by PiS. Short-term Polish money rates rose on Monday, suggesting the bank may turn more hawkish again. Simon Quijano-Evans, chief economist with Gemcorp Capital, said probably the biggest issue was whether a pro-EU coalition with Tusk at the helm could hold, although it should at least quell talk of Poland following Britain out the EU or cutting its support for Ukraine. “Stabilisation in Poland will definitely help in all of Europe,” he said.