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May 27, 2016

Hungary hailed as eastern Europe's leading nation

Poland's once dominating image as eastern Europe's flagship economy is being eroded by a star performing Hungary

Hungary is fast becoming the leading nation in eastern Europe, reports Reuters.

Poland's once dominating image as eastern Europe's flagship economy is being eroded by a more unorthodox mix of policies that the Warsaw government would argue has helped to turn nearby Hungary into a star performer.

Budapest, which regained its coveted 'investment grade' rating last week, appears to have swapped places in investors' affections with Poland as Warsaw takes a route one analyst has termed an 'Orbanisation' of the country's politics.

Whereas Hungary's stocks have soared 70 percent and its local bonds have surged in the last two years, Warsaw's have been hammered since it started veering in a similar direction.

Some say it might be an issue of timing. It took more than three years for the 'Orbanomics' rally in Hungary's markets to kick in, but investors don't seem willing to allow Poland time.

Stocks in Warsaw are down more than 20 percent since the start of 2015, S&P has cut its credit rating and the zloty has been central Europe's worst currency performer, down 8 percent versus the euro over the last year.

"The issue is politics, politics and politics," said Crédit Agricole senior emerging market strategist Guillaume Tresca.

"Poland used to trade like a safe-haven and Hungary was like a high-beta. Now it is a bit different, Hungary is a bit less high-beta and Poland has lost some of its safe-haven premium."

Capping it all, Poland's local currency bond yields briefly broke above Hungary's for the first time last month and their default issurance costs are inching towards each other.

Warsaw's political shift has also prompted a clash with the European Commission, which is now investigating changes in the way Polish judges are selected. Brussels has threatened to pursue a procedure which could ultimately strip Poland of its EU voting rights - something never done before.

Hungary's rating upgrade last Friday made it the first emerging economy to make the leap to investment grade in two years. Poland on the other hand suffered its first downgrade in January since the fall of communism in 1989.

S&P's global chief rating officer Moritz Kraemer says risks are to the downside for his rating on Poland, which is now three notches above junk at BBB+.

"There is a risk Poland gets downgraded," said Allianz Global Investors portfolio manager Shahzad Hasan, who has an overweight position on Hungary and underweight on Poland. "That (risk) is not negligible in the foreseeable future."

A longer-term worry is that the ruling party, PiS, seems to be tightening its control of Poland's judiciary and media. That is straight from the 'Orbanonmics' playbook, but with the EU chiding Warsaw after a decade as eastern Europe's economic poster child, investors are souring.

"Suddenly investors are having to take political risk (in Poland) into account that they haven't had to over the last eight years," said Rabobank economist Piotr Matys.