VIENNA (Reuters) - Poland's credit rating could get an upgrade if a reform-minded government emerges from next week's general election, Standard and Poor's credit analyst Kai Stukenbrock said on Monday.
Stukenbrock told the Reuters Central European Investment Summit in Vienna that Poland's current A/minus foreign and local currency debt rating has been constrained by political instability and delays to reforms.
"One of the main constraints is the political outlook, the lack of reforms, the need for further reforms, the need for further fiscal consolidation, for tackling the systems of social security," he said.
"So potentially, if a government came in that was very decisive in these matters, it could benefit the rating over the medium term."
Conservative Prime Minister Jaroslaw Kaczynski faces a tough challenge in the October 21 election from the main opposition party, the centre-right Civic Platform (PO). Unless they win an outright majority, the conservatives may lose power if the pro-business PO and the centre-left form a coalition.
Stukenbrock said the European Union's biggest ex-communist member had lost its way on reforms and that Kaczynski's government had failed to push ahead with cuts in welfare spending that international institutions say are needed to ensure the long-term security of Poland's public sector.
"From an economic reform and fiscal prudence perspective, when this government was formed that was already the worst case (scenario)," he said.
"Of course it's the Poles' decision and we're not questioning that at all. But from a reform perspective, that was probably the least reform-inclined government."
Despite the booming economy, Warsaw's high budget deficit will only fall below the European Union's 3 percent limit in 2009 and analysts say the relatively large pension and benefits system leaves it vulnerable to any dip in growth.
Stukenbrock said the government had not pushed public finances "over the brink", neither boosting the deficit nor making the needed spending cuts when the economy is on a roll.
"The downside risks from the election are relatively contained," he said. "I don't think it (re-election of the current government) would have a negative impact.
The finance ministry said late last month Poland's general government deficit is likely to be equivalent to 3 percent of gross domestic product in 2007 before dropping to 2.5 percent in 2010.
Investors have continued to pile into the country, with foreign direct investment seen at 11 billion euros ($15.7 billion) this year, according to the state investment agency PAIiIZ.
Economists say the continuing strength of foreign investment is a healthy sign for central Europe's biggest economy given recent political uncertainty and should help to underpin the strength of the zloty currency.
Stukenbrock noted that re-election of Kaczynski's government has the potential to turn off investors who have so far looked away from the political landscape.
"Investors might react differently this time around ... in the sense that when the government was initially elected people might have thought 'We are in Poland, we'll just stay there and they'll be out in two or three years and then we'll be back to normal,'" he said.
(For summit blog: summitnotebook.reuters.com/)