RPT-Fitch: New Poland Deficit Correction Target More Realistic

Thu Dec 12, 2013 7:52am EST

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Dec 12 (Reuters) - (The following statement was released by the rating agency)

The EU's decision to extend Poland's deficit correction deadline by an extra year sets the sovereign a more realistic but still challenging target, Fitch Ratings says.

Poland will now have until 2015 to bring its deficit below 3% of GDP after the EU said the country had failed to comply with recommendations made in June. The EU's criticism is consistent with our view that fiscal credibility was damaged by slippage relative to initial targets and by the suspension of Poland's first legal public debt threshold. This was a key reason we revised the Outlook on Poland's 'A-' rating to Stable from Positive in August.

Our baseline forecast sees the general government deficit in 2015 at slightly over 3%, which would be down from 4.4% in 2013 (deficit outturns for the second half of this year are running below the Polish government's mid-year estimates).

Fiscal forecasting for 2014 is complicated by the possible impact of pension reform, with the transfer of assets held by pension funds helping to generate a budget surplus of 4.6% according to our current forecast. The discontinuation of flows to private pension funds resulting from the reforms will also generate structural savings, and so contribute to future deficit reduction.

The projected fall also owes much to an expected pickup in economic growth over the next two years. We forecast real GDP growth in Poland rising to 2.4% in 2014 and 3% in 2015, up from 1.4% this year. Medium-term growth prospects are supported by the eurozone recovery, which will boost exports.

Nevertheless, there will still be challenges in meeting the target. In particular, political appetite for stronger consolidation will be weakened by elections in 2014-15. This means that stronger GDP growth is likely to be a stronger driver of deficit reduction than more politically contentious fiscal measures, such as additional entitlement spending reform.

The fiscal slippage seen in 2013, which was a major driver of our Outlook change, was largely due to weaker growth. The Polish authorities' ability to deliver a durable improvement in public finance sustainability remains a key element of our ratings assessment.

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