Fitch warns Poland on budget revenue assumptions

By bne IntelliNews August 31, 2016

The Polish budget is likely to receive less revenue from tax in 2017 than forecast by the government, which risks pushing the deficit to 3% of GDP or more, Fitch Ratings said in a note on August 31.

The rating agency joins Moody's in warning that slipping fiscal discipline in Poland could be credit negative. Moody's suggested last week that it is worried about the budget, raising concern over its forthcoming review of the sovereign on September 9.

Fitch notes that the preliminary budget approved by the Polish government on August 25 forecasts a general government deficit of 2.9% of GDP, up from an expected 2.6% in 2016. However, one-off revenues that are helping to balance the budget in 2016 will not be at play in 2017, while costs of large social expenditure projects will continue,

Warsaw's plan forecasts an 8.9% nominal increase in tax revenues to fill the gap. That, however, is too optimistic an expectation, according to Fitch, mainly because the government’s assumed economic growth is unlikely to take place.

The Polish economy is likely to grow by no more than 3.5% in 2017, the rating agency says, versus the government’s assumption for 3.6%. For 2016, growth is set in the budget at 3.4%, while it will likely come in at 3.2%, according to Fitch.

Weaker growth will undermine tax revenue and lead to a deficit of 3% of GDP in 2017, Fitch estimates. This will push Poland close to re-entering the European Commission’s Excessive Deficit Procedure less than two years after finally exiting.

However, for the meantime, the rating agency says its retains faith that Warsaw will continue to cut its cloth accrodingly. The Law & Justice (PiS) government has delayed several flagship policies pledged during its successful campaign ahead of elections in October, including rises in the retirement age and for the income tax threshold.

"Fitch believes the EU Stability and Growth Pact's (SGP) 3% of GDP deficit limit remains a strong anchor for fiscal policy in Poland, and would expect some policy adjustments if revenue growth disappoints," the rating agency's analysts write. "Poland exited the Excessive Deficit Procedure (EDP) in 2015 and reopening it would damage fiscal policy credibility. It could potentially result in financial sanctions via reduced disbursements of EU funds, a key driver of Poland's economic development since its accession to the EU in 2004."

Fitch’s analysis largely echoes warnings issued by Moody’s on August 25, alongside a number of analytical voices. According to a recent Bloomberg poll of analysts, GDP will expand 3.3% this year and next, from earlier predictions of 3.4% and 3.5%, and remain at the same level in 2018. The poll forecasts next year’s budget deficit will widen to 3.1% of GDP.

Moody’s also said that the escalating constitutional crisis in Poland could hurt investment, and therefore growth, and may affect its credit rating, which would make government borrowing more expensive. Moody’s update of Poland’s rating is due on September 9.

Standard & Poor’s cut Poland’s rating in January, much to the market's surprise, largely citing political risk to the independence of institutions. In May, Moody's cut Poland's outlook from stable to negative over the fiscal risks posed by the government, but left its A2 investment grade unchanged. Fitch Ratings affirmed Poland at A- in July with a stable outlook.












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