Warning from a credit rating agency?

04.03.2019 16:01|Marcin Lipka

"Fitch, as the first of the three main rating agencies, commented on the fiscal changes announced at the end of February by the ruling coalition in Poland. Can we expect further problems with the country's creditworthiness, as was the case in 2016?" writes Marcin Lipka, Conotoxia Senior Analyst.

Just over three years ago, Poland was experiencing serious problems due to a sudden rating cut by S&P. In January 2016, the euro exchange rate increased by 0.10 PLN during only one session. Treasury bond yields increased, and foreign investors were afraid and asked what to do with the condition of the Polish economy, which for years was considered to be the local, and perhaps even the world leader among emerging countries.

Over time the S&P Global Ratings' decision was exaggerated. Institutional risks (e.g. those related to the National Bank of Poland) did not materialize, and the path of debt to GDP was much better than expected three or four years ago. Finally, S&P withdrew from its January 2016 decision and Poland's rating returned to A-.

The upcoming elections in Poland, as in many emerging countries, carry fiscal risks. Fitch's position presented in Monday's announcement is not particularly alarming, but it may be the first warning signal in the context of too much spending growth and its impact on the rating.

High costs, high risk

Fitch's estimates suggest that the value of fiscal stimulation in 2020 may be close to 40 billion PLN (1.7% of GDP). The majority of these funds will be allocated to the Family 500+ child benefit program for the first child and the 13th month pay scheme.

However, the substantial financing costs of these programs will not result in a marked acceleration of GDP growth compared to previous estimates. "The growth benefits of the proposed fiscal changes are likely to be moderate, and household consumption will be a direct beneficiary," writes Fitch Ratings. The agency expects the GDP growth rate to decline to 3% in 2020 due to "declining investment growth".

Fitch Ratings points out that if the administration does not find additional revenue for the budget, "the deficit in 2020 could be pushed towards the 3% limit for initiating the EU's excessive deficit procedure".

Evaluation as early as March

In the summary of the analysis, Fitch points out the elements that may constitute an unfavourable signal for Poland's creditworthiness. The agency estimates that "any sign indicating that the importance of the 3% EU deficit criterion is weakening as a fiscal anchor or that the lack of stabilisation of the medium-term debt-to-GDP ratio may be negative for the rating".

The review of the rating itself will take place on March 29th. Probably no negative decision for Poland will be announced on that day. However, the very analysis of fiscal changes (extended 500 plus and 13th month pay) may show the risk of exceeding the EU deficit limit. Then global investors may once again have Poland under censorship, which could lead to more significant changes in the Polish currency or a decrease in the inflow of foreign investments.


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