Moody’s Investor Service affirmed Poland’s sovereign credit rating at A2, but changed its outlook from stable to negative on the back of fiscal risks and risks to the investment climate stemming from “unpredictable policies and legislation,” the ratings agency announced on May 14.

Moody’s rating decision was awaited with baited breath in Poland amidst heightened tension surrounding the government’s standoff with the constitutional court. The dispute had already served as part of the rationale behind a surprise cut of the Polish rating in mid-January by Standard and Poor's that sent the zloty tumbling and pushed bond yields up. Similar dynamics were seen ahead of the Moody's review as markets prepared for a downgrade.

The move to a negative outlook was the alternative scenario anticipated. Moody's cited the loosening of fiscal policy as justification. The agency also said question marks over a planned scheme to force conversion of foreign-currency mortgages and the “prolonged stalemate” between the government and the country's constitutional court were behind the change.

Markets will now be watching for the rating agency's next scheduled review in September. Poland's rating at Moody's is two notches above S&P's, and one higher than at Fitch.

The government’s spending plans, including a child benefit programme introduced last month, as well as a drop in the retirement age and for the income tax threshold, do not appear to have coverage in revenue after 2016, Moody’s frets.

Poland’s investment climate is also deteriorating, the agency notes, citing the presidential office’s attempt to push through conversion of foreign currency mortgages, which could pose danger to the banking sector. Moody's typically places more stress on the banks than other rating agencies.

The standoff over the constitutional court might hit the country’s institutional strength, especially with regard to the judiciary, the review continued. That risks an impairment of “investors' perception of the rule of law and thereby their propensity to invest.”
  
The agency retained Poland’s rating at A2, however, giving credit to the country’s “economic resilience as reflected in a large, diversified economy that has shown robust real GDP growth irrespective of external headwinds.”

Moody's expects real GDP growth to remain around 3.5% in 2016 and 2017, with net trade progressively driving growth as investment and private consumption are constrained by lower confidence and access to credit. 

“That said, over the longer term, low regional and occupational mobility, a suppressed female participation rate, market segmentation and high youth unemployment have the potential to impair Poland's growth trajectory,” the agency claims.