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. Last Updated: 07/27/2016

Ailing Ruble Sickens Poland's Zloty




WARSAW, Poland -- The Polish zloty ended a black week hovering around an eight-month low Friday, with Russia's perilous financial position dictating its direction.


Heavy selling of Polish debt has knocked some eight parity points off the zloty since Russia's effective ruble devaluation and suspension of foreign debt payments. The unit ended at 0.19/-0.13 from parity against last week's 7.65 above parity.


But analysts say the currency's fall may actually benefit the economy, easing pressures on the Central Bank to stem the zloty's rise and aiding in the battle against the current account deficit, long a thorn in the side of the economy.


"The main two factors are selling to meet expected redemptions of open funds and the situation in Russia, which is causing something like panic," said Slawomir Gajewski, fund manager at Credit Suisse Asset Management in Warsaw.


With risk-averse funds selling to meet redemption claims or to balance portfolios damaged by exposure to Russia, as much as $1 billion may have flowed out of Poland in the last week, said Miranda Xafa, currency strategist at Salomon in London.


Polish banks that took long zloty positions when the currency was reaching dizzy heights also abandoned the unit when they spotted foreign disinvestment, intensifying the fall.


"People trying to cover their losses in Russia seem to have initiated a chain reaction and the zloty is in a negative cycle," said Zsolt Papp, senior economist at SBC Warburg.


But Poland's economic ties to its neighbor and once-dominant political and trading partner are limited, with less than 10 percent of the country's exports going to Russia.


Poland's sound macroeconomic fundamentals -- a fifth year of over 5 percent growth in gross domestic product, a falling budget deficit and inflation under control -- are another argument in the zloty's favor for some investors.


"I wouldn't sell," Xafa said, "in fact I have a buy recommendation on dips below 5 percent."


A drop in the zloty will help struggling exporters recover lost ground and ease the pressure on the Central Bank to cut high interest rates imposed last year to strangle soaring credit growth.


And the zloty's fall poses little risk of importing inflation at a rate that threatens the government's target of 9.5 percent by the year end, said a leading Polish banker.


"Usually it [currency weakening] works with some delay and I hope it will not have a significant effect on inflation," Monetary Policy Council member Cezary Josefiak said.


"What's happening to Russia is quite helpful to Poland in the medium-term. I wouldn't be unduly concerned about it," said Rory Landman, fund manager at Baring Asset Management in London.