Aug. 23 (Bloomberg) -- Poland had its rating outlook reduced to stable from positive at Fitch Ratings, which cited the country’s reduced fiscal credibility.
Fitch maintained the foreign-currency debt grade of the European Union’s largest eastern member at A-, the fourth-lowest investment level, it said today in a statement from London. The company raised the outlook to positive in February, indicating an upgrade was more likely than a downgrade or the rating being left unchanged.
Poland on Aug. 20 raised the target for this year’s budget deficit as the worst slowdown in more than a decade crimped state revenue. The government also suspended debt limits to help spur the recovery as it’s gearing up for elections in 2015.
“The upward revision to deficit forecasts entails a later peak in gross general government debt than Fitch previously assumed,” Matteo Napolitano, an analyst at the ratings company, said in the statement. The suspension of of debt limits has “reduced the credibility of Poland’s rules-based fiscal framework.”
Fitch forecasts the country’s ratio of debt to gross domestic product will peak at around 56 percent in 2013-2014 rather than in 2011 as it previously assumed. The company also forecasts that the general government deficit will reach 4.2 percent of economic output this year because of “mainly weaker GDP growth.”
The zloty strengthened 0.5 percent to 4.2288 per euro at 7:28 p.m. in Warsaw and the yield on Poland’s 10-year government bonds fell three basis points, or 0.03 percentage point, to 4.49 percent.
Poland’s deficit will not fall below 3 percent of output until 2015, given the higher base and “our expectation that political appetite for stronger deficit reduction will wane ahead of the electoral cycle of 2014-15,” Napolitano said.
The government increased 2013 budget gap by 16 billion zloty ($5 billion) to 51.6 billion zloty this month. It also passed legislation to suspend fiscal safety rules that prohibit increasing the budget deficit once public debt tops 50 percent of gross domestic product.
The suspension would only apply to 2013 and 2014 and the safeguard threshold will remain in the amended public finance law, Finance Minister Jacek Rostowski said on July 16. A new spending rule, to be adopted separately, will increase “flexibility” in lean years and restrict expenditures when the economy speeds up, he said.
The suspension of the debt rule “could undermine confidence in the forthcoming permanent spending rule, which the government intends to cover a much wider share of public expenditure than the current temporary one,” Napolitano said.
It’s “hard to agree with” Fitch’s assessment of the change in fiscal rules, Deputy Finance Minister Wojciech Kowalczyk said in e-mailed statement today. The rule will allow Poland to “maintain sustainable fiscal discipline.”
To contact the reporter on this story: Piotr Skolimowski in Warsaw at firstname.lastname@example.org
To contact the editor responsible for this story: Balazs Penz at email@example.com