'Brexit' risks move east as Citigroup sees zloty most vulnerable

[PRAGUE] The world's biggest currency trader is starting to paint what-if scenarios for central Europe's leading currencies in the event of Britain's exit from the European Union.

Citigroup Inc says even though a so-called Brexit is unlikely, the EU's post-communist economies would be among the hardest-hit because they depend on subsidies from the bloc's wealthier members. Poland's zloty would be most exposed to a vote by the UK in June to leave the union, according to the bank.

"Central European economies may be potentially the biggest losers in case of a renegotiation of EU budget's rules and ceilings" triggered by a potential Brexit, Citigroup strategists including Piotr Kalisz in Warsaw and Luis Costain London said in a report to clients on Wednesday.

"The zloty stands out as a significantly vulnerable currency should EU structural funds gradually dry up."

Currencies and bonds of the bloc's east have largely resisted uncertainty about the EU's future composition which has weakened the pound and boosted risks for the euro, because of the region's limited trade and banking ties with the UK. Brexit could threaten billions of euros of funds that are now helping to build highways and other infrastructure from Poland to Romania, according to Citigroup, which joined France's Societe Generale SA and Commerzbank AG of Germany warning of the consequences for the region.

Poland's outgoing central bank Governor Marek Belka told journalists in Warsaw on Wednesday that a Brexit could "destabilize financial markets and that would probably influence the Polish economy."

Mr Kalisz and Mr Costa are echoing concerns voiced last month by Commerzbank that a Brexit would create risks for political and economic stability across the EU not reflected in emerging Europe's asset prices. Societe Generale told clients in a March 17 research report that the zloty would suffer the biggest losses because of its "proxy" status as the region's most liquid currency.

The Polish currency has gained 1.9 per cent against the euro in the past three months, trading at 4.2673 per euro on Thursday as of 9:50 am in Warsaw. The zloty has climbed 10 per cent against the pound in the same period.

Citigroup's exchange-rate forecasts, based on expectations that the UK will vote to stay in the EU, show the zloty will weaken to 4.39 per euro by the end of this year, compared with a median estimate in a Bloomberg survey for little change from current levels. Mr Kalisz declined to comment on Brexit beyond the report.

Poland, with its US$545 billion economy and 38 million people, is scheduled to receive 114.7 billion euros (S$200.52 billion) of subsidies between 2014 and 2020, the most of all 28 states, the EU website shows. Growth accelerated to 3.6 per cent last year compared with 2 per cent for the 28-nation bloc.

"We see Poland and Hungary as potentially the most vulnerable in the group, given that these two countries have been the biggest beneficiaries of the EU budget," according to the Citigroup note. "A reduction in EU funds would be a painful blow."

BLOOMBERG