Poland’s constitutional crisis credit negative, warns Moody's

By bne IntelliNews April 5, 2016

The ongoing constitutional crisis in Poland may hurt the investment climate and is credit negative, Moody’s Investors Service warned on April 4. The caution comes shortly before the rating agency's scheduled review of its rating on the sovereign on May 13.

Standard and Poor’s surprised as it offered Poland a 'political' downgrade to BBB+ from A- in mid-January, and moved its outlook to negative. The rating agency cited the Polish government’s recent moves to consolidate power via the constitutional court and state media as the leading causes.

S&P's peers both suggested around the same time that they could follow suit. Fitch, which rates Poland at A- with stable outlook, said the same day as the downgrade that evident relaxation of fiscal policy has shifted the “balance of risks to the negative side”.

Moody’s, which rates Poland at A2 with a stable outlook, warned on January 26 that the prospect of deteriorating fiscal indicators on the back of looser fiscal policy and relaxation of the country’s budget spending rule is "credit negative".

While bonds and the zloty have since recovered their poise somewhat, the crisis remains unresolved. That is undermining the country’s credibility with foreign investors, Moody’s said in a note on April 4.

"Poland is facing heightened political risk as a result of its constitutional crisis. These developments may impair Poland's attractiveness for foreign investors, a credit negative," the rating agencye said in a statement.

The analysts suggest investment flows thus far this year are a warning sign. "Net portfolio inflows have progressively declined in recent months and posted a negative reading at the beginning of 2016," they write in the note. "In January, Poland registered a net portfolio outflow of $3.1bn. The January 2016 outflow is the second largest reading in the last 10 years, ranking second only to the outflow registered in October 2008 after the Lehman collapse."

The note appears just the latest in a multi-pronged effort to get Law and Justice (PiS), the right wing party that took power in November, to back down. The government has effectively paralysed the Constitutional Tribunal (TK) since it pushed through a new law on the tribunal in December.

The constitutional row has raised alarm in Brussels and elsewhere. Warsaw has found itself the first ever EU member state subject to a European Commission probe into the state of the rule of law.









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