As FT Alphaville has been warning, Poland’s economy – once believed to be very much protected from the vulnerabilities facing some other new European Union members – is facing ever greater pressures connected to its foreign exchange exposure. This is due largely to its practice of borrowing in CHF or EUR denominated loans.
The zloty has been treading a downward path since the latter part of last year. The deterioration has been pretty rapid. According to research by TD Securities, on a carry-adjusted basis versus the dollar, only the Russian rouble has weakened more than the Polish zloty (followed by the British pound). Note the charts below on the zloty’s performance versus EUR and CHF in particular:
Those making the case against this being a problem say Poland’s fx-based mortgages only make-up a small slither of the lending market, worth no more than about PLN88 billion. However, it is increasingly apparent that this not just about retail mortgages.
As rating agency Fitch points out in its latest report on Poland released on Thursday (our emphasis):
According to data from the National Bank of Poland, 24% of all bank debt to the corporate sector was denominated in foreign currencies at end?December 2008. The agency notes that natural currency hedging adopted by many companies with foreign currency revenue and profit (like exporters) has in the short?term failed to fully offset the negative impact of the increased Polish zloty equivalent of debt on credit ratios — given the sharp zloty depreciation since September 2008.
To repeat- no less than a quarter of all bank debt to the corporate sector was denominated in foreign currencies. Indeed, a number of Polish firms have already seen the impact, among them home appliance maker Zelmer, foundry maker Odlewnie Polskie, which filed for bankruptcy on January 16th and Pulawy, Poland’s largest fertiliser maker.
Accordingly, it’s not the potential for some sort of ‘subprimski’ default wave that western institutions should we worried about. The threat is much wider and affects both retail and corporate borrowers across the board, not just in Poland. On the Polish case, however, Fitch concludes:
Fitch believes that the economic slowdown in 2009, following several years of strong economic growth, will have a more pronounced negative impact on the Polish corporate sector than the slowdown experienced in 2001 and 2002, when the GDP growth rate slowed to about 1%. This is driven by a recession in developed economies affecting Poland, and also corporates’ difficulties with access to external funding. Fitch expects Polish corporates in the current climate to pay more attention to alternative sources of funding (to pure bank debt), and also to be increasingly aware of the potential cost of failing to adequately hedge currency exposures. Additional challenges include the forecast high volatility of the zloty exchange rate and commodity prices in 2009.
By the way, the warning about commodity hedging in the bottom part of that statement may, in particular, be directed at Polish airliner LOT. The carrier reportedly locked into a 2-year oil hedge in July at a price of about $140 per barrel. At that rate, LOT stands to overpay by some 280m zlotys for fuel in the next two years.
As to the general currency exposure, Fitch provides some useful indicators as to when the main stress points might come:
According to data from the National Bank of Poland, about 33% or PLN74.5bn (EUR17.8bn) of bank debt to the corporate sector falls due in 2009, and another PLN15.3bn in 2010. Fitch expects that much of this debt will be refinanced by new bank loans, however bond issues are also likely to feature — especially given the current state of the banking market.
And if you want some other scary Eastern European statistics, or rather how the whole thing links back to the west, here’s some useful ones from Reuters (our emphasis):
Data from the Bank for International Settlements released last week showed Austrian banks’ claims on emerging European clients totalled $277.6 billion, or nearly 75 percent of Austria’s Gross Domestic Product .
For Sweden, claims mostly on clients in the Baltic countries of Estonia, Lithuania and Latvia represent 23 percent of GDP and for the Netherlands, exposed mostly to Polish, Russian and Romanian borrowers, this is just under 16 percent.
Related links:
Forex failure begins in Poland - FT Alphaville
Another Eastern European meltdown? - FT Alphaville