Poland's economic upturn supports sovereign rating – Fitch

Poland's ongoing economic upturn supports the country's sovereign rating, upgraded in January this year, as well as convergence of income levels with the more affluent EU members in Western Europe, Fitch Ratings said in a press release Tuesday.

"Fitch Ratings says in an updated sovereign report issued today that an economic upturn is supporting the ongoing convergence of Poland's income levels with wealthier EU countries," the agency wrote in the release. "It has also helped reduce external financing risks and improve the government's budgetary position, despite ongoing political risks. These ongoing trends were reflected in Fitch's January 2007 upgrade of Poland's Long-term Foreign Currency Issuer Default Rating (IDR) to 'A-' (A minus) from 'BBB+'."

The Polish economy expanded 6.1% last year and Fitch expects average growth of 5.5% over 2007-2009. While the solid economic expansion has led to some upward pressure on prices, the inflationary outlook remains benign. External deficits are well contained at a forecast 2.5-3.5% of GDP to 2009 and are offset by the strong foreign direct investment (FDI) inflows.

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"Combined with currency appreciation, these financing trends are likely to continue to mitigate the growth of Poland's external debt ratios," Fitch wrote.

The fiscal imbalance, a traditional weakness of Poland's sovereign ratings, has been less of a factor at the time of a solid economic performance, as the general-government deficit narrowed to 3.9% of GDP in 2006.

"Fitch expects the general government deficit to stabilise at around 3.5% of GDP in 2007-2009," the agency wrote. "This should be sufficient to keep the level of general government debt at 48%-49% of GDP, despite the ongoing costs of pension reforms."

While the cost of diverting social-security contributions to private-sector pension funds will contribute to fiscal deficits in the medium term, the financing of future pensions by the non-public sector is a significant boost for the long-term outlook on Polish public finances, Fitch wrote.

Political risks to Poland's sovereign creditworthiness have, in Fitch's view, moderated, though it cannot be discounted in view of the populist presence in the governing coalition. To date, however, the Law and Justice (PiS) party, the dominant force in the coalition, has been able to contain the less-benign influence of Samoobrona (Self-Defense) and the League of Polish Families (LPR), the junior partners in the coalition.

"The populist nature of the PiS's partners and lack of any fundamental shared economic ethos is nevertheless likely to mean that the political landscape will continue to be characterised by periodic intra-coalition conflict and there is the potential for populist spending policies to undermine recent improvements in the financial position of the government," David Heslam, director at the emerging Europe sovereign team in London, is quoted as saying in the release.

In the current political landscape, however, any structural and fiscal changes will likely remain modest and focused on efforts to reduce the tax burden, which Fitch evaluates a constructive development on the condition balancing cuts in expenditures can be found.

"Euro adoption is unlikely to be a major ambition for the euro-sceptic government, which has promised a referendum on the issue, and is not expected by Fitch until 2012," the agency also wrote.

Source: gielda.wp.pl