Sunday, 1 January 2012

End-year* thoughts

My last success this year was surviving the idle period between Christmas and New Year’s Eve. I don’t know why, but over five years of my studies it was the most depressing period of the whole year. I’m putting it down to low amount of daylight, imminent exam period and the fact that virtually everything comes into the standstill on those days. In the office we also were ticking over, but somehow being put through this period in the company of colleagues made it much less painful.

On Friday morning I kept refreshing the page showing current EUR/PLN quotation to witness the battle between Polish state, represented by NBP and BGK, and speculators. The former were to sell foreign currencies just before the fixing, the latter were to bet against zloty. The tug-of-war was short, featured with increased volatility and not really fascinating. The government got what it had wanted – public debt to GDP ratio was at ca. 54% - safely below the threshold triggering austerity measures.

Time to look back on my predictions from mid-January and bring myself to account for all the guesses that have turned out to be wide of the mark. Polish central bank’s benchmark rate is indeed 4.50%, in line with my forecasts, but home-owners paying off mortgages denominated in foreign currencies saw their instalments soaring in the summer, rather than slowly decreasing. WIG20 at the end of 2011 fell below 2,150 points, while I predicted 3,200 points. At the end of the day I’m an analyst so the outcome above should not surprise you at all ;-)

Financial markets have become so wobbly, as the situation in real economy has gone, that I will not dare to come up with any predictions for the coming year. I have some scenarios of possible future courses of event, but may they not be disclosed to the public. While I’m holding back, Michael decided to have a stab at it. Come the end of the year and we’ll see if he can rely on his intuition.

Just to recap the year which will has become a history.

In January I thought Polish economy would be thriving in the coming year and I was actually right, only the rest of the world was falling apart since then, the first report on causes of Smolensk crash was unveiled and prompted questions and heated disputes.

In February I took up my first permanent job and began to cast doubt on robustness of Polish economy.

Key issue in March was the pension system reform.

April passed very quickly for me, while the key event in Poland was the first anniversary of Smolensk disaster.

In May Catholics celebrated beatification of John Paul II, and end of days, due on 21 May didn’t happen to come.

In June I had first inklings of coming tsunami on financial markets and graduated from SGH.

July was extraordinarily wet

In early August politicians in the United States were haggling on what conditions to raise the debt ceiling and despite the assent to raise it, panic took over financial markets, and was exacerbated after S&P downgraded US rating.

September was marked by 10th anniversary of 9/11 attacks.

In October Poles chose that a predictable, but timid and often inactive PO-led government should run Poland for the second term.

In November I realised what the word ‘insecurity’ in the corporate would means (no link and no details) and the first re-sworn-in prime minister delivered his inaugural speech in which he focused on painful programme of healing Poland’s public finances and which brought about a sudden revaluation of stocks of one of the biggest Polish companies.

In December the story of lent 1,000 PLN dragged on and weather was very merciful.

The list of random events of 2011 is patchy and does not cover many issues which you might find important, yet which were not mentioned on the blog and escaped my notice.

Now when 2011 is left behind, try to guess what the future holds. I surmise in 2012:
1) financial markets will stay very volatile. Where exchange rates and stock markets head will depend on performance of real economies (watch out, I’ve just reinvented wheel) and strength of the eurozone,
2) politicians of the eurozone, faced with pressure of unrelenting financial markets will have to get to grips with insolvent, inordinately indebted PIGS and pull the plug on them. Greece will be forced to secede from the eurozone, re-establish drachma and devalue it to regain competitiveness,
3) winter will stay mild, there will be three incidences of proper winter, including one bringing heavy snowfalls and another with temperatures much below –10C at nights. Winter-time low in Warsaw will be –16C.

In 2012 all adverse effects of economic slowdown, that Poland escaped until now, will make themselves really felt. Polish economy will be expanding at slower pace, along with its trade partners who may even face a contraction. Weak zloty should prop up exports, but will also push up prices of imported goods, and thus inflation. Private sector will have to adjust their scale of operations to shrinking demand and many companies will be downsized. Savings will be looked for on cost side and because companies’ influence on prices of inputs is highly limited, payroll expenses will be cut. This will result in a wave of lay-offs, lower or no pay rises and higher unemployment.

Tax-burden-raising programme will hit Poles’ wallets. On 1 January excise tax on diesel fuels hike takes effect. From 1 February sickness benefit contributions paid by employers will be increased by two percentage points. Rising prices of fuels, energy and gas will probably keep reducing Poles discretionary income. This, in conjunction with job insecurity might put to the end gold times of consumer confidence that prevented Polish economy from shrinking in early 2009.

All property market analysts expect another year when prices will be going down, they only vary in determining the scale of decline. The factors that will contribute to lower property prices will be:
1) recommendation SII, issued by Polish Financial Supervision Authority, ordering banks to calculate creditworthiness of borrowers taking mortgages with longer than 25Y maturity as if they were to repay them in 25 years, this might reduce available loan amounts by some 5%,
2) implementation of more restrictive credit risk policies in banks, including virtually scrapping FX lending,
3) supply of properties on primary and secondary markets, much surpassing demand,
4) aforementioned lower discretionary incomes of households who might spend less on debt service,
5) drop in job security which prevents people from buying things they cannot afford to have
6) fading optimism among buyers, far less eager to live for 30 years with ball and chain called mortgage and more often noticing property prices have been exorbitant and hence holding off on buying a property,
7) growing number of young Poles working on “junk” contracts rather than having a permanent job, who, without stable source of income, are deemed to be not creditworthy for banks.

So everyone who has taken it for granted investments in properties are the quick and safe way to grow reach, please prepare for a rude awakening. Prices have already fallen by some 25% from peak noted in 2008 and are set to drop by some 10%, before they level off, at best. If four ago you pointed out that if in London for an average one can buy 0.35 sqm of a flat, the ratio should be the same in Warsaw, just keep your head down. Market will strike a health balance if the monthly-wage / sqm price ratio hits some 0.75.

I look at people who run up huge debts in CHF in 2007 or 2008 to buy tiny flats and I’m sorry for them. They’re carrying a burden disproportionate to what they “own”. There was no fully-fledged property bubble in Poland, but what was witnessed from early 2006 to mid-2008 had many features of a typical bubble.

I have already got the idea of taking out a mortgage out of my head. I don’t feel secure in terms of employment. I realise 2012 will be a year of ruthless cuts in banking sector and despite my good performance one day I might be made redundant. My savings are going up, property prices are going down, one day in two or three years they should meet half way. Cards aren’t stacked against me.

To make this post more optimistic, it is worth mentioning that several hundred kilometres of motorways and expressways will be opened in 2012 in Poland. Most not before Euro 2012, but we’ll have to lap this up, as construction will grind to a halt as soon as taps with EU funds are switched off.

And for a bitter ending, I’ll share with you a gut(-wrenching) feeling that’s nagged me over the past two weeks. In 2012 we’ll see a big disaster, not the one prophesised by Mayans, but an economic disaster which will be a shock for many and will result in huge turmoil on financial markets and in widespread social unrest. Something tells me the blow will be dealt in April or May.

Despite the doom and gloom emerging from the paragraph above, I wish you all a prosperous year. May you find self-fulfilment in everything you do.

* When I was setting out to write this post yesterday, these were supposed to be end-year thoughts. By some coincidence, I didn’t make it to the end yesterday and had to finish writing today; with some more effort ;-)


scatts said...

Bart. Very depressing. You need to get some medication for this SAD you suffer from!

I would agree with much of what you say if you had turned the optimism dial up a couple of notches.

student SGH said...

Ian, I'm kind of astounded by your reaction - you might find the post depressing, but medication? You could tell me that finding a girlfriend would do me good, this would at least hang together...

The post has a partly optimistic purport, just look:
1) volatility on financial markets is an opportunity to earn - you just to know how to handle the risks,
2) mild winter means saving on heating and lack of many nuisances caused by snow and low temperatures,
3) decreasing property prices in the coming years - great news for someone who plans, at the age of 26 or 27 buy a flat for cash,
4) new roads to be opened in 2012 - this also fills me with optimism.

The other parts of the post are simply realistic!

Take care