• Constitutional court row is ‘credit negative,’ Moody’s says
  • Moody’s cut outlook on Poland’s A2 rating to negative in May

Poland’s escalating political crisis threatens to impair investment spending and economic development, Moody’s Investors Service said two weeks before its scheduled review of the sovereign rating for the eastern European nation.

The crisis over Poland’s constitutional court is “credit negative” as it’s set to escalate tensions with the European Union and sour investment climate, which “threatens to reduce growth,” Moody’s said in a statement late on Thursday. The ratings company assigned a negative outlook to Poland’s A2 credit grade in May, citing waning confidence in the strength of the country’s institutions and in the predictability of its policy making.

While Poland’s nine-month-old government is struggling to accelerate the $475 billion economy after imposing new taxes on banks and retailers, it’s pushing ahead with plans to reduce the retirement age on top of record-high family benefits started earlier this year. Moody’s said it expects growth to amount to between 3 percent and 3.5 percent in 2016, even as political risks already impacted investment, which dropped 2.2 percent in the first quarter from a year earlier.

“Moody’s opened the door for a downgrade of Poland in September,” said Jakub Borowski, the chief economist at Credit Agricole Bank Polska SA. “However, we don’t expect that it will go through that door as evidence for crisis-driven drop in investment remains weak.”

EU Recommendations

The yield on Poland’s benchmark 10-year zloty bond rose one basis point to 2.69 percent at 1:13 p.m. in Warsaw and the zloty traded 0.1 percent stronger at 4.3286 per euro, rebounding from Thursday’s three-week low. Finance Ministry spokesman Waldemar Grzegorczyk declined to comment on Moody’s note when reached by phone.

Poland’s government fanned its political crisis last week by opening an investigation into whether the head of the country’s Constitutional Tribunal abused his powers. The ruling Law & Justice party, which revamped the top court twice in eight months, has failed to comply with EU recommendations to swear in judges appointed to the panel by the previous parliament and publish all of the tribunal’s rulings, which would make them binding.

In July, the EU’s executive in Brussels gave Poland three months to respond to its guidance on restoring the court’s ability to effectively review legislation, moving ahead with its first-ever probe into the rule-of-law of a member country.

Uncretainty, Fear

“If little changes before October, the EU could decide to apply sanctions,” Moody’s analysts Marco Zaninelli and Michail Michailopoulos wrote. “Such an action, even if it is of limited direct credit significance, would further impair Poland’s investment climate.”

Moody’s assessment of Poland’s creditworthiness is two steps higher than S&P Global Ratings, which cut its view by one level in January, and one step above Fitch Ratings.

Another factor curbing investment is the central government’s push to investigate public spending, especially those of EU funds at the regional and municipal levels where the Law & Justice party doesn’t hold much power, former central bank Governor Marek Belka said. Agents from the Central Anti-Corruption Bureau entered the offices of all 16 regional assemblies and several city councils in past months, an unprecedented move.

“Private investments -- they’re hardened by uncertainty, and as far as lower spending by local governments, it’s clear that that’s driven by fear,” Belka told TVN24 on Thursday.

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