Polish debt market negatively impacted by powerful bond supply and budget (opinion)
A massive increase in the supply of bonds and a dynamic increase in debt to the constitutional limit may negatively translate into the local debt market and increase its volatility, according to the managers of mutual funds company VIG/C-Quadrat TFI. In their view, the space for more interest rate cuts in Poland is small.
According to VIG/C-Quadrat TFI, Poland's draft budget for 2025 has surprised market participants. It assumes a deficit of PLN 289 billion (EUR 67.7 bln) or 5.5 percent of GDP, 3.9 percent GDP growth, 5 percent inflation and 4.9 percent unemployment rate.
"The budget shows another phase of fiscal expansion, which should support the consumer, who has been the only engine of GDP growth in recent times. What is concerning is another massive increase in bond supply and a dynamic increase in debt to the constitutional limit," VIG/C-Quadrat TFI investment director Fryderyk Krawczyk told a meeting with reporters on Thursday.
He recalled that an excessive deficit procedure has been launched against Poland by the European Commission.
"These trends may negatively translate into the local debt market and increase its volatility. An expansionary fiscal policy may support a restrictive monetary policy," Krawczyk pointed out.
The Polish government's borrowing needs are PLN 367 billion (EUR 86 bln) next year (PLN 304 billion or EUR 71.3 bln excluding PFR and BGK).
According to the investment director of VIG/C-Quadrat TFI, the domestic market will not absorb the supply of bonds in 2025. The solution is foreign investors or the redirection of liquidity from Poland's central bank NBP bills to Treasury bonds.
"The space for foreign debt is considerable, but foreign debt is more sensitive to the global economic situation," Fryderyk Krawczyk stressed.
According to the data he recalled, the share of bonds in the balance sheets of banks in Poland increased from 21 to 32 percent. For comparison, the share of bonds in the balance sheets of European banks is 25 percent, and that of American and Japanese banks is 20 percent each.
The growth in banks' assets annually amounts to PLN 130-150 billion (EUR 30.5-35.2 bln). Their net purchase potential reaches PLN 110-120 billion (EUR 25.8-28.1 bln), and the purchase potential of the non-bank sector is PLN 30-50 billion (EUR 7-11.7 bln).
Krawczyk recalled that the cost of debt servicing is growing very dynamically. The Ministry of Finance estimates it at around 12 percent of budget revenues in 2025.
The investment director of VIG/C-Quadrat TFI also challenges the common belief that interest rate cuts are pure profit on bonds.
His calculations show that a much better period for yields is seven months before the first cut in the cycle than seven months after the first cut.
"If we assume that the Monetary Policy Council will start the cycle of cuts in July next year, we still have a good period on bonds ahead of us," Krawczyk assessed.
Market expectations currently assume that interest rates in Poland will remain unchanged until the end of 2024, will be cut by 50 basis points by March 2025 and by 150 basis points within the whole of 2025.
"We expect inflation to rise in 2025, so there is no room for more interest rate cuts. The inflationary factors will be high nominal wage growth, increases in regulated prices, fiscal stimulus and base effects until February 2025," Krawczyk said.
Speaking about the condition of the Polish economy, the investment director of VIG/C-Quadrat TFI pointed out that moderate GDP growth in the coming years should support the fight against inflation, there are no recessionary signals from the economy, and GDP growth is based on one engine, the consumer, which the government will support in the coming years.
pr/ ao/
