Polish Sausage-Seller, Czech Carmaker Reel as Currencies Soar

By James M. Gomez and Dorota Bartyzel

Sept. 26 (Bloomberg) -- The Polish zloty's record strength, once a source of patriotic pride, is turning into a national curse.

Slawomir Kawalec is still reeling from the hit his sales of kielbasa sausages, hams and steaks took in western Europe, his biggest export market, after the Polish currency soared to an all-time high against the euro and dollar.

``It was cataclysmic,'' said Kawalec, president of Sokolow- Eksport, Poland's largest meat exporter. ``This was a real shock wave for us, and only now are we slowly trying to get out from under it.''

Record currency advances in Poland, the Czech Republic and Hungary, former communist nations that joined the European Union in 2004, are devastating exporters, crimping tourism, reducing the value of EU aid and bedeviling policy makers struggling to keep their economies growing amid the global slowdown. The same exchange-rate forces are contributing to inflation in western European countries that import food from the east.

The Czech koruna is the best-performing emerging-market currency in the past 12 months, gaining 13 percent against the euro and 16.4 percent against the dollar. The zloty has advanced 13.2 percent against the euro, and the Hungarian forint is up 4.6 percent.

Fueling the Gains

Several trends are fueling the gains. Economic growth in Poland and the Czech Republic is more than triple the euro region's 1.4 percent expansion in the second quarter. Investment increased in all three countries after EU trade barriers were removed. Interest rates are at a three-year high in Hungary and Poland.

While central bankers initially lauded the strength of the currencies as a barrier to inflation, economists, executives and political leaders now say it is doing more harm than good.

``This year's gains and the pace of the appreciation may be a serious and painful test'' for many exporters, said Waldemar Czarnocki, chief of Paged SA, Poland's largest domestic furniture maker.

Their customers feel the pain too. The 10 eastern European members of the EU exported 8.6 billion euros ($12.6 billion) of food and livestock to the euro zone in 2007, representing 12 percent of total food imports for the 15 nations using the common currency, according to Eurostat, the EU's statistical office.

The inflation rate for the euro region rose as high as 4 percent in July from 1.7 percent a year earlier, chiefly because of food and oil prices.

Too Expensive

``We try to compensate for the zloty gain with higher prices in Germany'' and the U.K., two of Sokolow's biggest markets, said Kawalec. ``But their inflation has made things too expensive for many people as well, and they have also been suffering.''

A Sept. 10 survey of 426 companies by the American and Czech Chambers of Commerce in Prague shows that more than a fourth of businesses with operations in the Czech Republic may move facilities to counter the negative effect of the currency's appreciation.

``The stark strength of the koruna affects not only some industries but weighs considerably on the entire economy,'' said Martin Jahn, vice president of the Association of Industry and Transportation, a private industrialists' group.

Jahn is a former executive at Skoda Auto AS, the Czech subsidiary of Volkswagen AG and the biggest Czech exporter. Skoda's first-half profit fell almost 10 percent because of exchange-rate losses.

Profit Margins

Skoda isn't alone. Forty percent of Czech companies say the currency's strength has cut exports by more than 5 percent, and 54 percent report it has eaten into profit margins, the survey shows.

One of those companies is Tatra AS, the 158-year-old heavy- duty truckmaker nestled in the northeastern Czech mountains near Poland and Slovakia. Tatra exports 80 percent of its vehicles, making it acutely sensitive to even small exchange-rate shifts, says General Director Ronald Adams, who is also a shareholder.

The koruna gains lopped $9 million off of this year's profit so far, he said. To counter that, Adams, an American, may relocate some production to the U.S.

``This year's just been very surprising,'' he said. ``I've said recently that we're building trucks for export in the most expensive country in the world.''

No Cheap Wine

For tourists, the days of cheap wine, beer, lodging and food in eastern Europe are over, said Pavel Hlinka, president of the Czech Association of Hotels and Restaurants. Revenue at shops and restaurants in the center of Prague, the Czech capital, is expected to fall as much as 30 percent this year, according to the Association of Czech Tourist Agencies.

In the Hungarian capital of Budapest, fewer customers visit the Gerbeaud Coffee House to sit at its marble tables, nibble cakes and sip espresso under 19th-century chandeliers.

``I can't recall that ever happening, at least not in the eight years that I've been here'' said Gerbeaud General Manager Katalin Pinter. ``To say the forint has hurt us is an understatement.''

Local governments' budgets are squeezed because so-called EU structural funds are worth less when converted from euros into local currencies. The EU provides the money to help new members in eastern Europe modernize sewers, roads, bridges and other infrastructure to western European standards.

Whittling Budget

About three hours from Warsaw, the Polish capital, Marian Licznerski is whittling down the programs he can afford to start as mayor of Lubawa. The city of 10,000 people applied for the equivalent of 11 million zloty ($4.8 million) in EU aid to finance projects including paving roads, modernizing a water- treatment plant and laying new sewer lines.

The work would provide local companies -- including Szynaka Meble, which makes furniture for Ikea -- with safer and faster transportation links and modern utility hookups.

The amount of aid Licznerski will actually receive may be far less than he budgeted because of the advancing zloty. Without the improvements, growth in the county will be halted, hurting the local economy.

``There won't be enough money to make me happy and satisfied,'' Licznerski said in his office, where communist-era wood paneling contrasts with Ikea office furniture. ``We cannot get compensated for the losses of the euro.''

To contact the reporters on this story: James M. Gomez in Prague jagomez@bloomberg.netDorota Bartyzel in Warsaw dbartyzel@bloomberg.net