|PiS, led by Jarosław Kaczynski, will soon be able to replace nine members of the central bank's monetary policy committee and the governor|
Investors in Poland’s new eurobond were horrified. Polish policymakers were apoplectic. Even perennially pessimistic analysts thought it was going a bit too far.
On January 15, rating agency Standard & Poor’s stripped Poland of its single-A status. Worse still, it slapped a negative outlook on the sovereign’s new BBB+ rating.
The move, which caught markets completely unawares, sparked a weakening of the zloty and a sharp sell-off in Polish bonds – including the €1.75 billion of notes issued just five days earlier. It also prompted a furious response from the country’s new Law and Justice (PiS) government, which called it “incomprehensible”.
It is certainly, at least from an economic perspective, surprising. As S&P acknowledged, the short-term outlook for Poland remains positive. Growth is forecast to top 3% for at least the next three years. Debt-to-GDP ratios are expected to remain stable.
The downgrade, however, was not primarily based on economic factors. On the contrary, S&P made it clear that the main reason for its action was the weakening of the independence and effectiveness of key institutions in Poland since PiS’s election victory in October.
This has been achieved through a series of measures, including changes to the composition of the country’s constitutional court, moves to bring public media outlets under direct government control, and a clean-out of the civil service.
As S&P noted, none of this bodes well for the independence of the central bank, given that PiS will be able to replace nine members of the monetary policy committee and the governor later this year.
Undoubtedly, these moves indicate a worrying trend. The question is whether, in the absence of negative economic indicators, they justify a ratings downgrade.
PiS lawmakers, and a surprising number of independent analysts, insist that they do not. They are, however, missing several points.
One is that headline sovereign ratings are not intended to reflect current economic conditions but the probability of default on long-term debt. It does not seem unreasonable to argue that a cavalier attitude towards institutions designed to protect investors and ensure macroeconomic stability increases the risk of such an event.
Secondly, as S&P pointed out, there is in fact no lack of shorter-term negative economic indicators. PiS has made some lavish spending promises that it is planning to fund through swingeing taxes on banks and big retailers. Combined with a likely hefty hit from the forced conversion of Swiss franc mortgages, this could severely impair banks’ willingness and ability to lend to the real economy.
Even so, the government may find itself struggling to pay for some of its more ambitious pre-election pledges. S&P, which described the 2016 budget as “too optimistic”, reasonably pointed out that this is likely to lead to persistently higher fiscal deficits.
Finally, there is the question of precedent. Poland’s new rulers are known to be fervent admirers of the nationalist and interventionist economic model espoused by Viktor Orban’s government in Hungary. Many of their key policies, from suborning state institutions to sectoral taxes, are straight out of the Fidesz playbook.
Leaving aside the question of whether Orbanomics has been good for the Hungarian economy, what is unarguable is that it has cost the country its investment grade rating. Even after several years of fairly healthy growth, the sovereign still has a double-B rating from all three major agencies.
Repeating an action and expecting to get a different result is not sensible. If PiS policymakers had remembered that, Poland’s downgrade might not have come as quite such a surprise.