Fitch affirms Polish rating despite mounting risk

By bne IntelliNews July 17, 2016

Fitch Ratings affirmed Poland's long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A-' and 'A,' respectively on July 15. 

The outlook on the country's rating was maintained at “stable,” defying speculation ahead of the scheduled review that the agency might change it to “negative”. Speculation over a drop in the outlook followed a downgrade by Standard & Poor's in January. All three major ratings agencies have warned of risks to the independence of institutions and fiscal consolidation. Work on a scheme to force conversion of forex loans is another notable issue.

Fitch, however, says the rating reflects Poland's strong economic fundamentals, while it notes that government debt is close to the country's rating peers median. GDP growth in recent years has supported an increase in GDP per capita, however, that remains low relative to peers, Fitch points out. Downside risks relate first of all to reduced predictability in economic policy since Law and Justice (PiS) took power in October 2015.

The PiS government has implemented “unorthodox measures,” including a bank tax and “some fiscal relaxation,” – primarily a multi-billion zloty programme of child benefits. Measures that could further affect financial and fiscal stability, such as the scheme to convert foreign currency mortgages, are under consideration, Fitch observes. 

The agency also noted political developments, especially changes at the Constitutional Tribunal that have led to a standoff with the European Commission. “These developments could affect Poland's attractiveness as a place to do business,” the analysts suggest.

Poland’s real GDP growth will likely slow to 3.2% in 2016 and 3.3% in 2017 from 3.6% in 2015, Fitch notes. Lower than expected external demand is a key risk, especially after the Brexit vote, with 6% of Poland's exports going to the UK. Private sector investment could also be affected by post-Brexit referendum uncertainty and adverse policy developments.

Fitch also expects general government debt will peak in 2018 at 53.2% of GDP and remain thereabouts in the medium term, assuming the government applies some fiscal tightening from 2018. That forecast has been increased from a peak of 51% of GDP in 2016.

Despite deficit risks having been commonly cited as one of the effects of the government's loosened fiscal policy, Fitch expects Poland’s deficit to be largely contained and not exceed the EU-required threshold of 3% of GDP. The budget gap is predicted at 2.8% of GDP in 2016 and 3.0% in 2017.

Poland's external position is on an improving trend, Fitch observes. The current account balance was -0.2% of GDP in 2015, compared to 3.6% of GDP on average in 2010-2015, owing to improved competitiveness and, more recently, the fall in commodity prices. The country ceiling is affirmed at 'AA-' and the short-term foreign currency IDR at 'F2'.

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