Polish economy and zloty in 2020. What awaits us in 2021?

What was the condition of the Polish economy in the past year, marked by the COVID-19 pandemic? How was the zloty doing and what may the coming 2021 bring for the main currencies? Experts Saxo Bank commented on the most important issues at the turn of the year.

According to Christopher Dembik, director of macroeconomic analyzes at Saxo Bank, Poland effectively reacted to the pandemic by using new monetary policy tools, such as the purchase of sovereign debt by the central bank, which contributed to minimizing the effects of the crisis. From the beginning of the pandemic NBP he bought around 50% of newly issued government debt, which corresponds to the level Bank of England.

John J. Hardy, Director of Forex Strategy at Saxo Bank, summed up the situation of the Polish currency, which started 2020 in good shape, around the highest level since the beginning of 2018 against the euro, but lost its value around 10% during the collapse of world markets caused by the Covid-19 pandemic in March.

- The value of the zloty stabilized relatively quickly and losses were reduced by about half before the rate started to fluctuate within a wide range - returning to the lows against the euro due to concerns that Poland will not receive funds under the new EU budget ", despite that the EU finally pushed the issue away and the PLN strengthened again - and ending the year roughly in the middle of the range on an annual basis and with a decline of around 5% against the euro, and an increase of over 3% against the rapidly weakening USD at the end of the year - comments Hardy.

Economy in 2021

According to Christopher Dembik, in 2021 it can be expected that further monetary easing will be necessary to cope with the consequences of the crisis and the risk of a new lockdown.

- Another rate cut is not an option as it would not be an effective tool. First of all, we envisage two channels of easing monetary policy: 1) an increase in the purchase of Treasury bonds, which would guarantee very attractive borrowing costs and prevent a significant strengthening of PLN against EUR and USD, and 2) implementation of creating new loans or modifying the creation of existing loans (i.e. modification of loans bills of exchange) - Dembik claims.

- At the moment we do not think that the NBP will make direct purchases of corporate debt, mainly for technical reasons, as the market lacks high-rated instruments. As in other European countries, the pace of recovery will largely depend on the success of the vaccination campaign. In other words, the vaccine will offer the best stimulus package. By reducing the spread of the pandemic, it will restore confidence - so important to the economy - and will release all savings accumulated in recent months, causing a strong recovery in economic activity - comments Christopher Dembik.

What about the zloty in 2021?

- Taking into account that we expect inflation to increase next year, the zloty may not achieve particularly good results if the NBP maintains its current very accommodative approach - believes John Hardy.

- Even before the pandemic, alarming signals of inflationary pressures in Poland appeared, as a result of which inflation significantly exceeded the interest rate of the central bank, which means that keeping deposits or bonds in the Polish currency is highly unattractive due to the negative real return. 

According to Hardy, if this situation repeats itself in 2021, the PLN may show a side rate or decline against the euro. However, in the case of a more negative scenario for the global recovery, the PLN may depreciate slightly more than in the relatively optimistic baseline scenario.

- The pessimistic scenario is nevertheless worth considering if it takes longer than anticipated to normalize economic activity or if US interest rates rise rapidly, depressing global asset markets despite the support of economic recovery - adds Hardy.

John Hardy also points out that the issue of the EU budget and the "rule of law" has not really been fully resolved and will undoubtedly reappear sooner or later.

- It will be a constant, unpredictable risk for the PLN, especially in a situation when some specific actions of the Polish government exceed the acceptable limits in the opinion of the EU.

Euro, franc and dollar

- Under the scenario of strong global recovery with some inflation increase, we suspect that the Swiss franc will slightly lose against the euro, so it would be quite a slight change for the CHF / PLN exchange rate. In 2021, we predict a depreciation of the US dollar (if our more optimistic scenario materializes), which would most likely mean that the PLN would gain another few percent against the USD next year. Moreover, as already mentioned, the euro may strengthen against the PLN - believes John Hardy.

2021 marked by Biden, Yellen, USD and economic rebound

According to John Hardy, in 2021 the relationship between Joe Biden / Janet Yellen and the USD exchange rate will be of great importance. The most important event, however, may come on January 5, if the Senate elections in Georgia are won by the Democrats. Thanks to this, they can get a slight advantage in Congress (50-50 in the Senate, and Vice President Harris can have the deciding vote), and the scale of potential fiscal stimulus in the United States can increase significantly.

- Apart from the above, 2021 will also see the degree of rebound in economic growth as vaccination starts, and even if vaccination proves to be relatively effective - will the fiscal stimulus, both in the United States and in Europe and elsewhere in the world quickly phased out if growth and inflation prove particularly impressive initially - says Hardy.

- China is also very important as it tries to deleverage the economy in a way unprecedented in recent history, which can also lead to political mistakes if the authorities misjudge the resilience of the economy and the financial system.