Poland’s Preempted Pension Pioneers

Polish shares retreated 5 percent through July, as the Law and Justice Party government continued to come under fire from Brussels for judicial interference and human rights, and plans were finalized for Swiss Franc mortgage and private pension conversions. The securities services received permission to conduct surveillance without court approval, while the constitutional tribunal was stripped of independent power, drawing criticism from NATO members arriving for a Warsaw summit. Top officials have mostly shrugged off the “elite” disapproval and claim the EU backlash is orchestrated by former Prime Minister Tusk as a top representative. Hundreds of journalists have also been purged from the state media and they have hesitated to question another phase of private pension shutdown, with one-quarter of their $35 billion in assets to be transferred into a government-appointed manager. They lost half of holdings in 2014 when Treasury debt was removed and cancelled, and only a handful of funds remain after dozens were launched, led by Pioneer Investment from the US in the late 1990s. The party needs the cash for ambitious infrastructure and social spending schemes, but rolling back foreign domination of the sector with major German, Dutch and Italian players is a dual aim. The shift will increase the stock exchange free float, as the group owns majority company positions, and savers may be offered tax incentives to encourage continued voluntary allocations in an untouched pension “third pillar” which has atrophied in recent years. Banks have been a popular portfolio buy, and a scramble is already in course to prepare for mortgage losses with mandatory zloty switching and the longer-term vision of putting 70 percent of the industry in local hands. Austria’s Rafeissen and Italy’s Unicredit sold domestic units, following GE Capital’s unloading in April. Polish and foreign investors have bought the stakes in the belief profitability will withstand the indigenization movement and a new financial transaction tax under 0.5 percent. They note that Hungary’s banking policies set a precedent for good MSCI performance, with the index up almost 20 percent at end-July, and that unlike Budapest IMF program ties in the form of a contingent credit line are intact. Prime Minister Orban’s agenda there has now turned overwhelmingly to refugee handling, where an October national referendum may reject the EU’s quota system.

In frontier markets Romania increased less than 5 percent on the MSCI as the fiscal deficit looked to exceed the 3 percent of GDP goal with VAT reduction and minimum wage hikes. With new elections ahead, the government may also reduce worker social security contributions for popular appeal, despite likely IMF criticism in the next review of its precautionary facility. Bulgaria was down near 10 percent as unemployment reached 8.5 percent despite an increase in tourism earnings of the same magnitude in Q1 with diversion from Egypt and Turkey. Serbia was also a disappointment despite improvement in the current account gap to 4 percent of GDP, the best in 15 years on sliding energy costs. Portfolio investment has been skittish with T-bill yields at a record low 4 percent, and a sovereign Eurobond or UAE direct placement may be needed to replenish $9 billion in reserves offering only a 6-month import safety net.