Page 16 - Poland Outlook 2022

Poland’s budget is also hardly transparent, as the government has become
notorious in shifting billions to funds and other institutions financed outside of
the scope of public finances and with much less – or in fact next to no –
scrutiny.

Of key spending items, the 2022 budget bill proposes an increase of health
care financing to 5.75% of GDP, a 4.89% valorisation of pensions, and
earmarking 2.2% of GDP for defence, exceeding the Nato-proposed target of
2%. The budget will also spend over PLN6bn for anti-inflation measures
(which analysts say will only prolong the fight with elevated prices).

6.0 Markets outlook

6.1 FX

Throughout 2021, the Polish zloty remained the worst performing currency in
Central and Eastern Europe and one of the weakest in the basket of emerging
market currencies (only the Turkish lira and the Argentine, Chilean and
Colombian pesos were weaker). The weakness of the zloty continued despite
economic recovery after the initial shock of the pandemic, the monetary
tightening by the National Bank of Poland and the central bank’s changing its
tune from the weak zloty being supportive of exports to the zloty "is
inconsistent with monetary policy pursued by the NBP”.

“In our opinion, the EUR/PLN exchange rate may remain at an elevated level
in 2022, as is typical for crisis times. The space for the strengthening of the
Polish currency is relatively small and burdened with many risks,” Bank
Millennium says.

Of the domestic factors that could strengthen EUR/PLN, the key one appears
the approval of Poland’s National Reconstruction Plan – the government’s
framework to spend money from the EU’s pandemic recovery facility – by the
European Commission. The issue is in limbo because Poland remains in
conflict with the EU over its judiciary reforms, which Brussels says threaten the
independence and impartiality of the courts.

The zloty could also appreciate in line with further monetary tightening by the
NBP.

The consensus at the beginning of January is for the zloty to appreciate
modestly against the euro to 4.50 from around 4.60 at the end of 2021.

As for USD/PLN, the market expects a slight appreciation in 2022, as typically
the zloty weakens as the dollar appreciates. “As we assume stabilization of the
EUR/USD exchange rate this year, we expect the Polish currency to
strengthen,” the newspaper Puls Biznesu wrote.

Other than the EUR/USD exchange rate, the same domestic factors will be at
play as in the EUR/PLN case, so higher interest rates, the release of the
money from the EU’s pandemic recovery fund, and reduced volatility on foreign
trade.

The consensus for USD/PLN is appreciation from nearly 4.1 to 3.94 at the end

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