Poland stronger than Hungary, despite political risks

By:
Jeremy Weltman
Published on:

A new government emphasizing Hungarian-style nationalist, unorthodox policies with increased public spending has raised uncertainty over Poland’s risk profile. However, the sovereign borrower is in a strong position and is less indebted than Hungary.

Jaroslaw Kaczynski-R-600
Jaroslaw Kaczynski, the leader of Law and Justice, leaves a booth after casting his ballot

Victory in the recent elections for Law and Justice (PiS), the nationalist, eurosceptic party driven by socialist-religious ideals, spells a marked change in policy direction for Poland – which has been offering a haven of stability for Central and Eastern European investors.

Up to the election, Poland had been pushing higher in Euromoney’s country risk survey, rising four places to 29th, sandwiched between Slovakia and Japan on 66.9 points from a maximum 100:


The sovereign was on the right track, pursuing broadly market-friendly policies and exhibiting decent macro-fiscal metrics, with most of the survey macro-indicators scoring more than six points out of 10; bank stability more than seven.

Real-terms GDP growth of 3.4% last year has continued into 2015, with domestic demand underpinned by mild deflation and low borrowing rates.

Gradually falling unemployment, a current-account deficit close to balance, and favourable deficit and debt indicators – within EU limits – justify Poland’s stable A-rated investment-grade credit ratings.

Cause for alarm?

The election result saw five-year CDS spreads push out to 75 basis points on the fear Poland could follow Hungary’s path using unorthodox revenue-raising measures to fund higher public spending without structural reforms.

Regulatory/policymaking risks have edged higher and Poland’s rise through Euromoney’s ranking might be clipped by what the government does in office.

If it goes ahead with plans to reverse pension reforms, provide state support for the coal industry and seek to influence the central bank, its country-risk score might be affected.

Yet Poland is in a far stronger starting position, and although the government has mooted it might abolish the public-spending rule enshrined in law, it is promising to keep to the 3% of GDP deficit.

ABN Amro senior economist Peter de Bruin echoes the views of many other risk experts, saying: "The effects of PiS’s election victory should not be exaggerated."

The party’s pre-election pledges are likely to be scaled back in government, as is the case with most parties when they take office.

"The PiS government will not want to risk losing access to EU funds," says De Bruin.

The government will try to keep its budget deficit within 3% of GDP, complying with the EU’s fiscal rules. Indeed, Poland is less likely than Hungary to want to cause damage to its EU relations.

After all, party veteran Jaroslaw Kaczynski hardly favours Russia and will welcome Nato and European institutions as suitable bulwarks.

Besides, while Hungary and Poland have similar structural deficits, Polish debt is much lower at 52% of GDP compared with Hungary’s 75% – measured on a gross basis – and is well within the EU’s 60% guideline. The two have markedly different risk profiles: 

That’s not to say there aren’t any concerns at all.

One such issue is how to convert Swiss franc-based mortgages into local currency to alleviate the burden on Polish borrowers. In this instance, copying Hungary’s plan might not be a bad thing.

Hungary has been improving lately, and is on course for a return to investment grade, and it would take quite a rise in risk for Poland’s ratings to be downgraded. 

This article was originally published by ECR. To find out more, register for a free trial at  Euromoney Country Risk.