TEXT - Fitch revises Poland's ratings outlook to positive
Feb 21 - Fitch Ratings has revised the Outlook on Poland's Long-Term foreign and local currency Issuer Default Ratings (IDRs) to Positive from Stable and affirmed the IDRs at 'A-' and 'A', respectively. In addition, Fitch has affirmed Poland's Country Ceiling at 'AA-' and its Short-Term foreign currency IDR at 'F2'. RATING RATIONALE The revision of the Outlook to Positive from Stable reflects the following factors: - Poland's general government deficit in ESA 95 terms has narrowed by around 4.5 percentage points of GDP since 2010, to an estimated 3.4% of GDP in 2012, placing it among the EU's best performers. Fitch forecasts further, mild consolidation, to 3.2% in 2013 and 2.7% in 2014. - Public debt has stabilised and is forecast to moderate to 54.5% of GDP in 2014 from a peak of 56.4% of GDP in 2011, closing the gap with the 'A' median. Reforms to the pension system adopted in 2012 will improve the medium-term sustainability of public finances. Reforms to the business environment - evident in an improvement in the World Bank's indicator - are underway and could lead to an increase in potential growth in the long term. The affirmation reflects the following key rating factors: - Poland has a solid track record of resilience to the eurozone debt crisis, despite strong economic and financial links with Western Europe. Medium-term growth prospects are healthy, despite an expected slowdown in 2013 to 1.6% on the back of subdued domestic demand. Polish exporters are well placed to take advantage of the eurozone recovery, and to make inroads into new, more dynamic markets. The EU budget for 2014-20 will allocate EUR105.8bn to Poland, helping it to bridge remaining infrastructure gaps and enhance prospects for long-term growth. - Fitch assumes that Poland possesses sufficient buffers in the form of a USD33bn flexible credit line with the IMF and a substantial pool of bank liquidity to counter external shocks and the risk of an outflow of non-resident (NR) holdings of Polish zloty (PLN) denominated sovereign bonds. NR holdings reached a record high of 36% at end-2012. - In Fitch's opinion, the Polish banking system is well supervised and represents a relative rating strength. The 2013 outlook for the banking sector remains stable, despite weaker expected growth and profitability. Housing loans denominated in foreign currency (mostly Swiss francs) stood at 55% of total residential mortgages at end-2012 (end-2009: 65%) and remain a potential weakness given the Polish zloty's volatility. However, their share in total loans was moderate at about 20% at end-2012. - External debt ratios are still high (39% of GDP in 2012 in net terms against a 'A' median of negative 1.6%) and represent Poland's main rating weakness, despite a forecast reduction in Poland's net external debt as a share of GDP. Nevertheless, a combination of a narrowing of the current account deficit, an increase in foreign exchange reserves (FXR) in 2012, lower external debt redemptions and economy-wide deleveraging are forecast to reduce Poland's annual gross external financing requirement to around 100% of FXR in 2013-14 from an average of over 140% in 2007-12. - Poland's 'A-' rating is supported by a credible monetary and exchange rate regime (free float), strong fiscal financing flexibility, governance indicators in line with the 'A' median and political stability underpinned by EU membership. RATING OUTLOOK AND SENSITIVITIES The Positive Outlook reflects the following risk factors that may, individually or collectively, result in an upgrade of the ratings: - Continued progress with fiscal consolidation that further lowers the budget deficit and puts the public debt ratio on a clear downward path. - A material reduction in external debt ratios. Future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include: - A pronounced fiscal loosening that endangers the achievement of medium-term deficit and debt reduction targets. - Weak economic performance, resulting either from external or domestic shocks. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions. - Fitch's economic and fiscal projections are based on the assumption that budget outcomes are broadly in line with the Polish government's intention to narrow the ESA 95 general government deficit to 1% of GDP in structural terms by 2015, in line with the Medium-Term Objective agreed with the European Commission. Furthermore, the agency assumes that the government will honour its commitment to adopt a fiscal rule constraining all budget expenditure (and not just discretionary spending as is the case now). - Fitch's debt sustainability analysis suggests that under reasonable assumptions, including trend growth of around 3%-3.5% and the maintenance of a small primary fiscal surplus after 2014, public debt will remain on a modest downward path into the medium term. The agency assumes that the government would put in place the necessary consolidation measures to avoid a breach of the constitutional debt ceiling of 60% of GDP (calculated on a separate national methodology). - Fitch assumes that the eurozone remains intact and that there is no materialisation of severe tail risks to global financial stability that could trigger a sudden increase in investor risk aversion and financial market stress on the Polish sovereign and banking sector. - Fitch assumes that under severe financial stress, support for Polish subsidiary banks would come first and foremost from their parent banks.