Moody’s should stop kicking its heels – a Polish downgrade is overdue

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By:
Jeremy Weltman
Published on:

Poland’s declining risk score trend in Euromoney’s survey signals the rating agency is lagging experts in the field.

Warsaw clocks-R-600
Time’s ticking: for Poland to take measures to maintain growth and for
Moody’s to act

The sovereign borrower began concerning the risk experts when the elections in October 2015 produced a majority in parliament for the Law and Justice Party guided by leader Jaroslaw Kaczynski’s socially conservative, religious-inspired policies.

Poland’s risk score fell heavily in the final months of 2015. The downward trend continued in the first half of 2016, and it might not stop there: 

ECR_Poland_2016-600

The fears of risk experts were well-founded when the government embarked on legislative measures altering how the Constitutional Court can reject laws and began undermining media independence, interfering with institutional checks and balances.

Poland’s institutional risk score – one of 15 political, economic and structural risk factors contributing to its total score – dropped in advance of these moves.

The government’s failure to uphold the rule of law means it could soon face the possibility of being the first errant EU member state to face sanctions from Brussels – a symbolic move, but one that is likely to impair its investor credentials.

On a score of 64.8 points, and languishing 33rd in Euromoney’s global rankings, Poland is hanging on to the lowest rung of tier two, the second of five categories into which all 186 countries in the crowd-sourcing risk survey are divided.

The Q3 survey is presently under way.

Any further falls in its risk score would see Poland edge precariously towards tier three, though even now its credit rating should be no higher than A-, putting Moody’s rating of A2 – equivalent to A, one notch higher – out of line with the consensus.

Populist spending pledges, including more family benefits and a lowering of the retirement age, threaten not only to halt the five-year declining budget deficit trend, but also push the deficit back above the EU’s 3% of GDP limit, with the economy slowing.

In 2017 the deficit is projected to come in just below this, at 2.9% according to the government, but that figure is wholly reliant on strong economic growth.

'Worrying'

To date, Poland has enjoyed a favourable growth trend. It is still expanding faster than most economies in Europe, but the pace is slowing and capital spending is a weak spot with taxes imposed on banks and retail companies.

“The decline in investment is worrying,” says Bank Pocztowy chief economist Monika Kurtek.

It fell by 4.9% year-on-year in the second quarter, on the heels of a 1.8% fall in Q1.

“Slower economic growth is a risk for the state budget and public finances more generally, which are already tight,” she adds.

Moreover, Brexit has weakened the outlook for trade and business confidence across Europe, and the impact will be worse next year, as and when the UK pushes forward on its plans to withdraw from the EU.

This, at a time of increasing risk stemming from elections in Germany and France, among other countries, bank sector problems in Italy and the interminable Greek debt crisis.

The Danske Bank team taking part in Euromoney’s survey expects 2017 to be “more challenging [for Poland], given the full-year cost of child benefit cheques and uncertain revenue prospects”.

It will mean introducing more revenue-raising measures, if the government does not cut back on planned expenditures.

Poland’s risk factor scores for the economic-GNP outlook and currency stability have been downgraded. The credit rating and capital access scores have similarly dropped.

Poland is not a major risk, but it has become unquestionably a bigger one.

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