Will the rating shock the zloty?

12.01.2017 11:22|Conotoxia.com

On January 13th (this Friday), two of the leading rating agencies will evaluate Poland’s loan credibility. However, it seems that the market reaction will be quite calm, regardless of the decision from both Fitch and Moody’s. Commentary from Marcin Lipka, Cinkciarz.pl senior analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

Last year’s information regarding a downgrade of Poland’s rating from A- to BBB+, as well as a revision of its perspective from positive to negative, caused panic in the market. The zloty wore off immediately against the basic currencies and the euro went from 4.41 to 4.49. The reaction of the bond market was intense as well. Profitability of the ten-year debt instruments increased by 0.2 percentage points. This increased the anxiety of financing the Polish debt.

The euro’s exchange rate returned to its previous level after approximately one month. However, this was partially caused by a positive investment sentiment in the emerging markets. The zloty remained weak against the forint for almost the entire year. Moreover, the cost of financing Polish debt was higher than the cost of financing Hungarian debt for the first time in history.

A worse evaluation of Poland’s loan credibility was also pictured by the comparison of the Polish five-year bonds to the German five-year bonds (expressed in the euro). The second half of 2015 brought a spread between the two countries’ profitability within the range of 0.5%-0.8% (average: 0.65%). In 2016, this spread was within the range of 0.64%-1.1% (average: 0.85%). Currently, this index is at the level of 0.93%. This may suggest that even if there were another downgrade, the reaction would be relatively limited. This is because the current evaluation is already pessimistic.

What will Moody’s do?

In May 2016, Moody’s decreased Poland’s rating from stable to negative. The reasons for this included fiscal risks related to increasing expenses (23 billion PLN for the 500+ program in 2017, for example), a potential decrease in retirement age, an increase in tax-free amount, the deterioration of the investment sentiment and conversion of currency credits expressed in francs.

In the following announcements, Moody’s mostly took note of a danger of lowering the retirement age. However, on September 29th the agency emphasized that it has been observing, whether new incomes will balance new expenses. This may suggest that Moody’s will wait a few more months in order to estimate whether plans for 2018 will contain additional incomes.

Getting back to the announcement from May, Moody’s claimed that one of the potential reasons for the deterioration of the future rating are the deterioration of the government’s fiscal situation, or a significant wear-off of the investment sentiment.

In 2016, the deficit of the public finance sector will definitively be lower than estimated. This does not fit the definition of a “deterioration of fiscal situation.” Investments actually have decreased, but this was mainly a result of limits in EU projects. Moreover, this phenomenon has been observed in other countries of the region.

In conclusion, Moody’s won’t likely decrease Poland’s rating on Friday. However, there is a large chance that the perspective will remain negative and it will contain clearly emphasized risks of lower retirement age, as well as the necessity of finding additional income, which would balance the expenses.

What will Fitch do?

In July, Fitch left both Poland’s rating and perspective unchanged. However, the announcement clearly shows that the agency mainly focused on elements that may cause a deficit of the public finance sector to exceed the 3% level against the GDP.

Fitch agency claimed that the argument in favor of downgrading Poland’s rating would be any signal regarding a wear-off of the EU deficit criteria against the GDP. Moreover, the agency stated that it will focus on the potential lack of intensifying fiscal policy in order to stabilize the debt against the GDP in the mid-term, as well as the conversion of currency credits.

The above mentioned dangers haven’t been occurring for the time being. Additionally, the bulletin from the Polish Press Agency from November 17th informs that the agency referred to a decrease in the retirement age and suggested that, “the EU deficit criteria remains significant for the Polish fiscal policy and we expect the government to adjust, in order to ensure that the deficit remains below 3% of the GDP.”

Minor impact on zloty

The suggestions from both Fitch and Moody’s are similar. Both agencies are waiting for the government’s methods of financing new expenses. Therefore, the basic parameters of the rating will most likely remain unchanged. If the global sentiment is neutral, this should strengthen the zloty by approximately 0.01-0.02 PLN.

However, if Moody’s decides to downgrade Poland’s rating and Fitch changes the perspective to negative, the reaction on the zloty would be limited as well. The market has been evaluating Poland’s lower loan credibility since the decision from S&P. A slight correction of the rating made by Moody’s or Fitch, should not change the situation significantly. Moreover, a limited wear-off of the zloty caused by such an announcement will quickly disappear among the everyday moves within the currency market.

 


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