Financial analysis

From March to mid-June 2001, the Polish zloty continued to appreciate, albeit in an increasingly chaotic and volatile manner. Frequent sell offs would be followed by sharp rallies. Asset managers were more and more aware of the degree of slowdown in the national economy. While this should conversely be good news for fixed income investors as it caused inflationary pressures to decline further, it was a source of increasing concern for equity investors. The market’s general appetite for risk remained relatively high, helped in large part by continued monetary easing by the Federal Reserve. Next, the National Bank of Poland was also cutting interest rates, albeit cautiously in the face of clear evidence of abating price pressures. Yet,both the pace and extent of zloty strength were a cause of concern to investors, and it seems also to the Polish government. Ahead of elections in September, the AWS-led government was increasingly desperate to boost the flagging economy, whether by interest rate cuts, fiscal expansion or a weaker zloty. Markets feared a change in exchange rate policy, either by the existing government or more likely by the opposition, which looked increasingly likely to win the election and in the end did indeed do so. Around June, given the gains seen by then in both Polish bonds and the currency, a combination of market concerns over fundamental deterioration in the economy, notably in the trade balance, and over the prospect of a likely SLD election victory in September triggered increasing interest by investors, particularly offshore investors, to take profit on those gains.