Poland to Skirt Another Downgrade as Moody’s Is Kept at Bay

  • Moody’s set to hold Poland’s rating at A2, most economists say
  • S&P downgraded Poland first time ever after change in power

Poland will win another reprieve from Moody’s Investors Service on Friday, saving it from its second-ever sovereign downgrade after the government vowed to rein in deficits and the president watered down a $35 billion mortgage-relief plan, a Bloomberg survey showed.

Moody’s will keep Poland at A2, the fifth-lowest investment grade, where it’s been since 2002, according to 10 of 15 analysts in the poll. Three respondents said the rating will be cut to A3 with a stable outlook, and the rest see a one-step downgrade.

The European Union’s biggest eastern economy is working to regain the trust shaken after the Law & Justice party swept into power last year. As a backlash built after its efforts to assert control over state institutions, and tensions escalated with partners in Europe and the U.S., S&P Global Ratings in January handed the country its first-ever credit downgrade, a decision that rippled through markets and unsettled businesses. Moody’s followed five months later by lowering the outlook to negative from stable, pointing to “fiscal risks” and a toll on the investment climate of policies it called unpredictable.

“The balance is neutral and we expect no change,” said Maciej Reluga, chief economist at Bank Zachodni WBK in Warsaw. “The information incoming since the last update in May was positive -- a less harmful FX loan bill and no major spending rise in the 2017 budget -- as well as negative,” such as the government’s conflict with the top court and weaker economic data.

The zloty, the worst-performing currency in developing Europe after the Turkish lira in 2016, weakened 0.3 percent to 4.3383 against the euro as of 4:55 p.m. in Warsaw. The yield on Poland’s benchmark 10-year bond rose five basis points to a six-week high of 2.90 percent, while Warsaw’s WIG20 stock index dropped 2.2 percent, heading for the lowest close since July 14. Moody’s will publish its assessment after Polish markets close on Friday.

Court Clash

The new government revamped the Constitutional Tribunal to make it more difficult for it to strike down laws, sparking an unprecedented probe by the European Commission into a member state’s democracy. The standoff has shown no sign of letting up, with officials saying the executive was “at war” with the judiciary after last week’s call by an extraordinary congress of judges for the government to respect the constitutional division of power.

Moody’s warned in May that an escalation or continuation of the conflict with the constitutional court that results in “substantial” outflows of capital could put the rating under downward pressure. Its negative outlook means there’s at least a one-in-three chance of a cut over the next 24 months.

While economic growth has disappointed, the government has signaled it will hold next year’s budget deficit below the EU’s threshold at 2.9 percent, ensuring the flow of 82.5 billion euros ($93 billion) in the bloc’s development funds earmarked for Poland through 2020. Moody’s has forecast the shortfall at more than the 3 percent limit in 2017.

Budget Outlook

“Fiscal consolidation that leads to a decrease of the structural budget deficit, and improvements in the long-term sustainability of the social security system as well as in the institutional framework, would exert upward pressure on the outlook,” the rating company said on May 14.

The zloty has rallied on expectation Moody’s will take no action. The Polish currency has gained for four straight days in the longest streak since March, trading on Thursday at the strongest against the euro in more than two weeks.

Almost all economists surveyed by Bloomberg predict the zloty will give some ground after Moody’s announces its decision, depreciating to 4.35 on Monday, according to the average of all forecasts in the poll.

“While we don’t expect any changes in the rating, we suppose that the comment will point at the dominating negative risks, mainly on the side of fiscal policy,” said Marta Petka-Zagajewska, an analyst at Raiffeisen Bank International AG’s Polish unit in Warsaw. “Thus the decision -- in our view -- will be more likely a no cut for now than no cut at all.”

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