Poland in Moody's Cross-Hairs as Analysts See More Bad News

  • All but one economist forecasting negative action by Moody's
  • Poland had its first-ever sovereign downgrade by S&P this year

As Poland braces for a credit review by Moody’s Investors Service, the only question for economists is how bad the news is going to be.

All but one of the 21 analysts surveyed by Bloomberg forecast the company will take negative action on Friday. More than half see a downgrade of the sovereign from A2, the fifth-lowest investment grade, where it’s been since 2002. Nine respondents say only the outlook will be cut to negative after a decade of being ranked as stable.

“Political risk looms large in Poland,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, Germany. “The erosion of democratic checks and balances calls into question the long-term credibility of the nationalist Polish government to service its debt.”

The shine has been off the European Union’s biggest eastern economy since a new government led by the Law & Justice party swept into power last year. Markets buckled in January after an unexpected downgrade from S&P Global Ratings, the nation’s first by one of the three major credit assessors, which followed a political standoff at home and a deepening rift with European partners and the U.S.

‘Credit Negative’

Moody’s warned last month that heightening political risks in the country were “credit negative.” The government hasn’t received any signals that Moody’s will cut the rating, according to Deputy Prime Minister Mateusz Morawiecki.

“I don’t know what Moody’s move on Poland will be and I don’t have a reason to assume it will be negative as economic data are positive,” Finance Minister Pawel Szalamacha said in parliament on Thursday.

For the past two years, gross domestic product has expanded faster than 3 percent annually each quarter, with growth jumping to 4.3 percent in the final three months of 2015. GDP gained at a slower pace in January-March, adding 3.5 percent from a year earlier, according to the median of 35 estimates in a Bloomberg survey. The Central Statistical Office is due to release the data on Friday.

Broader Challenges

While S&P cited concern over the independence of key institutions, including the constitutional court, the central bank and public media, the focus is shifting to the economy and the fiscal outlook in the east European country of 38 million people. The government, which took power in November on promises of extra child benefits and higher wages, is putting pressure on public finances with spending increases and plans to lower the retirement age.

Also alarming investors are costly pledges to increase tax-free income and convert the equivalent of $36 billion in Swiss franc-denominated home loans.

“On the side of facts we have big new expenditures, and on the side of revenues -- only promises,” said Marta Petka-Zagajewska, an analyst at Raiffeisen Bank International AG’s Polish unit in Warsaw. “The expected negative trend in public finances, further signs of deteriorating institutional effectiveness and risk for the financial system generated by conversion of foreign-currency mortgage loans are in our opinion strong arguments in favor of lower rating.”

S&P, Fitch

Poland currently has its highest credit rating from Moody’s. S&P’s downgrade pushed it to BBB+, the third-lowest investment grade. Fitch has kept it at A- since 2007.

Market reaction may be more muted this time. Polish debt has already underperformed peers in emerging Europe since the shock S&P move, which forced traders to reassess their perception of the nation as a haven in the developing world. After the downgrade, the zloty suffered its biggest rout since September 2011, while the government’s local-currency bond yields jumped the most in more than two years.

The Polish currency will be at 4.4 versus the euro at the end of trading on Monday following Moody’s announcement, according to the median of 13 estimates in the survey. That compares with a level of 4.4112 at 5:29 p.m. in Warsaw on Thursday.

The government isn’t worried when the zloty trades in a range of 4.2-4.5 per euro, according to Morawiecki. The currency is down 3.7 percent this year, worse than its regional peers including the Romanian leu and Hungary’s forint.

‘Purely Political’

Law & Justice has given little ground to critics. Officials have called S&P’s downgrade “unfair and purely political” and said it overlooked one of the fastest-growing economies in the EU. Last month, Prime Minister Beata Szydlo blamed opposition parties for fueling a selloff in the zloty.

Under its long-term financial program, the government is targeting higher spending this year and next while postponing fiscal austerity until 2018-2019, when several elections are scheduled to take place.

Foreign investors held 54.2 percent of outstanding total Polish debt at the end of February, according to Finance Ministry data. The yield on 10-year zloty government bonds slipped two basis points on Thursday to 3.006 percent.

“The importance of this decision is huge,” said Jakub Borowski, the chief economist at Credit Agricole SA in Warsaw. “With a second rating downgrade, it could de facto cap foreigners’ demand for Polish bonds.”

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