Poland safer than its credit ratings suggest
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Euromoney Country Risk

Poland safer than its credit ratings suggest

Poland’s secure risk profile is still justified, according to economists and other country-risk experts taking part in Euromoney’s Country Risk Survey. With the sovereign holding steady this year in ECR’s global rankings, and on a longer-term upward trend, its credit ratings should be adjusted upwards.

In contrast to the uncertainties still affecting many eurozone member states, Poland has seen its score improve to 66.5 out of a possible 100 points in Q3 2013 – 1.7 points above its low-point during Q4 2012.

The country’s resilience to external risk highlights that the Czech Republic and Slovakia are not the only sovereigns that offer investment-grade security across Central and Eastern Europe.

An improving economic situation in the second half of 2013 has seen scores for three of Poland’s five survey economic indicators – the economic-GNP outlook, monetary policy/currency stability and employment/unemployment – improve during the past 12 months to offset deterioration in government finances.

Contracting domestic demand has weakened the spectacular growth rates averaging more than 4% for the past two decades, forcing the general government gross deficit (EU definition) close to 5% of GDP this year, from 3.9% in 2012.

However, Poland has avoided recession, with real GDP growing by 1.9% last year and an estimated 1.3% in 2013, according to the European Commission (EC), slowing sharply where others have careered downwards.

Plus, the EC’s monthly surveys indicate business confidence has brightened lately, with manufacturers, service-sector firms and even the hard-pressed construction industry reporting improved sentiment levels through to October.

With a trade surplus emerging, the current-account deficit has more than halved to less than 2% of GDP, from more than 4% in 2010/11, inflation has substantially eased and the debt burden, although climbing, is expected to peak at just under the EU’s 60% of GDP ceiling this year, before falling sharply in 2014, mainly in response to a pension reform.

The latter will interrupt the deficit with a one-off surplus next year, owing to a technical transfer of pension assets, but the underlying position will still improve as the structural deficit narrows.

Impervious to a large degree to the eurozone’s travails, Poland has climbed two places in the global rankings this year and no less than 14 since 2010 – an upward trend that has seen this rapidly developing EU member state rise to a position of relative safety within the second of ECR’s five tiered groups, some two points above the EU average (see chart).

According to ECR expert Piotr Kalisz, chief economist at Citi Handlowy: “Although Poland has gone through a substantial slowdown in recent quarters, it managed to avoid recession and its near-term growth prospects seem quite favourable.

“Apart from the cyclical recovery, domestic demand should be fuelled by a relatively more supportive fiscal policy, as changes in the pension system will create some fiscal space. As such, the Polish economy can grow [in real terms] by slightly more than 3% in 2014.”

It is a favourable outlook shared by other ECR experts, including ABN Amro’s senior economist Arjen van Dijkhuizen, who states in his latest research report: “Poland is well-positioned to weather potential market turmoil.”

Malgorzata Szalucka, assistant professor at Nicolaus Copernicus University, adds: “Changes in the Polish government were the centre of attention this week. However they did not cause a significant reaction on financial markets, despite a new minister of finance. Changes in the Polish government are perceived as a refreshment of image.”

With the country now safer than South Korea (still falling in ECR’s survey), and sandwiched between Malta (above) and Israel (below) – both of which are rated A by Fitch – Poland’s stable A- ratings (or A2 equivalent according to Moody’s) seem lower than is justified by its ECR score, particularly in light of Poland’s tightened CDS spreads this year in line with Slovakia (see chart).

A comparison of Poland’s economic and political-risk indicator scores in the chart (below) show very few negative characteristics compared with Malta, but with Poland’s risk profile buttressed by its perceived bank-stability strengths and more favourable economic-GNP outlook.

The latter indicator is also stronger when compared with Israel, although Polish safety is otherwise more skewed towards its political-risk advantages, notably in terms of its institutions and government stability.

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

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