Standard & Poor’s cut Poland’s foreign currency sovereign credit rating to BBB+ from A- and changed its outlook from positive to negative on January 15.
In what some analysts judged a novel development, the downgrade stemmed not from macroeconomic or fiscal developments, but was primarily a result of negative assessment of the Polish government’s recent moves to consolidate power via the constitutional court and state media. The actions do not bode well for institutions important for the economy, S&P said.
With all three of the major ratings agencies scheduled to review Poland after market on January 15, there had been some suggestions that they could express concerns over the recent political controversy. However, the downgrade was something of a surprise.
Fitch Ratings noted the same political developments, but did not go on to stake a similarly strong claim on their detrimental effect on economy. Fitch affirmed Poland at A- with stable outlook. Moody’s did not issue a review.
According to S&P, the new Law and Justice (PiS) government is working towards weakening key public institutions, with “potential for further erosion of the independence, credibility, and effectiveness of key institutions, especially the National Bank of Poland (NBP).”
The cut immediately sent the zloty tumbling. The currency lost nearly 2% to the euro by close of trading on January 15; over 1.4% against the US dollar and 1.75% versus the Swiss franc.
Poland’s finance minister was clearly furious. “Standard and Poor’s does not take the economy into account and is concentrating on politics. The economy is doing great,” Finance Minister Pawel Szalamacha told TVN24 television on January 16. “The agency made a mistake and will have to backtrack on this erroneous decision,” he demanded.
S&P, however, will claim that the political issues look set to hit the economy. In particular, the agency worries that public finances could see deterioration in the next 24 months. The government made several social spending pledges during its election campaign. That has seen it raise the deficit targets for both 2015 and 2016, as well as relax the state spending brake.
Near-term, S&P projects the fiscal deficit will reach 3.2% in 2016 as revenue measures will fail to cover expenditure on schemes including increased child benefit payments. “We no longer expect Poland’s fiscal metrics will improve as we previously forecast,“ S&P writes.
The measures aimed at boosting revenues include taxes on banks, insurers, and large retailers – sectors with substantial foreign ownership – and pose questions about Poland’s attitude toward growth-driving foreign direct investment, the ratings agency adds.
S&P forecasts growth at 3.3% on average in 2016-2018, but warns problems with growth could appear, longer-term, if the economy fails to move from a growth model relying on cheap labour and labour-intensive industries to higher-value-added and more innovative industries. PiS’ willingness to keep the coal-mining sector afloat suggests the government does not see such a move as urgent, the analysts hint.
“This is a new era in ratings, where ratings agencies are telling us that they increasingly care more about politics and the reform outlook than any positive economic fundamentals that may support a country’s story,” Commerzbank commented on S&P's move with evident surprise.
“The message to other sovereigns out there is very clear – don’t touch the constitutional framework that has been built up over so many years, or else a downgrade and a subsequent increase in funding costs will ensue,” the analysts claim.