(Bloomberg) -- Polish stocks and bonds — among the world’s stand-out performers of 2025 — dipped after a nationalist unexpectedly won the presidential election, dealing a blow to the government.
Investors are concerned that the victory by the resurgent right, which has been emboldened by Donald Trump, may unravel Poland’s pro-European Union tilt — impacting both fiscal and monetary policy and imperiling the rally in the nation’s assets.
Warsaw stocks slumped 3.4% on Monday before recouping most of the losses. Polish dollar bonds were among the biggest losers in emerging markets, while the zloty traded in the middle of a pack of 31 major currencies.
For now, traders are finding solace in the country’s strong economic growth. Roger Mark, a fixed-income analyst at Ninety One UK Limited, called the market reaction “relatively contained.” But in the coming months, markets will be on the lookout for friction between Prime Minister Donald Tusk and incoming President Karol Nawrocki, and whether that might exacerbate Poland’s hefty budget deficit.
“The outcome of the elections might harm the positive sentiment of this year,” said Adnan El-Araby, a fund manager at Barings Emerging EMEA Opportunities. “We now have to be more selective.”
Nawrocki, a conservative historian and former boxer, won 50.9% of Sunday’s runoff ballot, while centrist Warsaw Mayor Rafal Trzaskowski took 49.1%, according to unofficial tallies from the electoral commission.
More Downside
Henrik Gullberg, a macro strategist at Coex Partners, said the market-leading performances by Polish stocks and the zloty mean there’s more downside to a Nawrocki win than upside had Trzaskowski come through.
Poland’s WIG20 equity index traded 0.8% lower as of 3:53 p.m. in Warsaw, with banks leading the selloff. The gauge was up 40% in dollar terms this year as of Friday’s close, one of the strongest rallies globally.
“A Nawrocki win is thought to revive tensions with Brussels, stall judicial reforms, and therefore jeopardize access to over €130 billion ($148 billion) in crucial EU funding,” Gullberg said.
The yield on benchmark 10-year local-currency government bonds increased 10 basis points at 5.45% on Monday. The asset class had returned nearly 16% in dollars since December — the best performance among developing markets after Brazil and Mexico until just before the ballot. The zloty was down 0.2% against the euro after the vote.
“This result adds mild possible depreciation pressures,” said Raffaella Tenconi, chief economist at Wood Finance Ltd. “But they’re likely to be very minor.”
Poland’s fiscal deficit remains front and center for investors. At more than 6% of economic output — largely due to a massive build-up in defense spending amid war in neighboring Ukraine — it’s the largest in the EU after Romania’s. Campaign promises risk further deepening the shortfall.
The election “will hinder the implementation of necessary reforms and may favor the maintenance of an excessively loose fiscal policy,” said Piotr Bujak, chief economist at PKO Bank Polski SA.
Thwarted Agenda
Tusk’s agenda has been largely thwarted by the outgoing president, who, like Nawrocki, is backed by the opposition Law & Justice party. The election of a more radical successor could exacerbate the paralysis.
Piotr Matys, a strategist at In Touch Capital Markets Ltd., said the result creates the risk “that Tusk’s coalition may collapse, leading to early general elections,” which would otherwise be due in 2027. The premier, who will have a televised address at 8 p.m., may call a parliamentary vote of confidence in his cabinet, Onet.pl reported Monday.
The ballot could also make Polish policymakers more reluctant to extend interest-rate cuts, according to economists at Morgan Stanley, Citigroup Inc. and Banco Santander SA.
If Central Bank Governor Adam Glapinski sounds “less accommodative” at Thursday’s conference, it may hit bonds, Ninety One’s Mark said.
State Assets Minister Jakub Jaworowski, who oversees the government’s controlling stakes in seven of the companies in the WIG20 index, said Nawrocki’s victory will prolong a period of “elevated instability.”
“It has been difficult, but it will be now even harder,” he said in Sopot, northern Poland. He vowed to continue to focus on improving corporate governance and building shareholder value.
--With assistance from Matthew Burgess, Joanna Ossinger, Maciej Martewicz, Andras Gergely, Peter Laca, Piotr Bujnicki, Agnieszka Barteczko and Selcuk Gokoluk.
(Updates with latest market moves and adds comments from analysts, starting in the third paragraph.)