Fitch Affirms Poland at 'A-'; Outlook Stable

Fri Feb 14, 2014 12:06am EST

LONDON, February 14 (Fitch) Fitch Ratings has affirmed Poland's Long-term foreign currency Issuer Default Rating (IDR) at 'A-' and local currency IDR at 'A'. The Outlooks are Stable. The issue ratings on Poland's senior unsecured foreign and local currency bonds have also been affirmed at 'A-' and 'A', respectively. The Country Ceiling has been affirmed at 'AA-' and the Short-term foreign currency IDR at 'F2'. KEY RATING DRIVERS The affirmation and Stable Outlook reflect the following key factors: The Polish economy has shown a high degree of resilience and stability. Fitch forecasts that real GDP growth will pick up to 3% in 2014 and 3.2% in 2015 from 1.6% in 2013, above eurozone and regional averages, but slightly below the 'A' category median. Growth drivers are likely to shift from net exports to domestic demand, as household consumption and private investment recover. Public investment is also expected to contribute as resources from the EUR106bn (25% of annual GDP) allocation from the 2014-2020 EU budget gradually begin to flow. Nevertheless, Poland remains exposed to eurozone developments via extensive trade and financial links. Fitch forecasts that Poland's gross general government debt (GGGD) ratio will fall to 50% of GDP in 2014, broadly in line with the 'A' median, from an estimated 58% in 2013. This will result from the transfer in early February of Treasury securities and other debt instruments worth the equivalent of 8.5% of GDP from open pension funds (OFEs, the second pension pillar), and subsequent cancellation of the Treasury securities. Fitch judges this development to be rating-neutral, as it will also reduce the stock of assets to meet future pension provisions. Nevertheless, it should generate savings in terms of debt servicing and transfers to the pay-as-you-go first pension pillar, which the Polish government estimates at 1% of GDP annually. This should help reduce the general government deficit to just below 3% of GDP in 2015, broadly in line with the 'A' median, from an estimated 4.6% in 2013. Fitch forecasts that Poland's net external debt ratios will still be markedly above the 'A' median in 2015. However, they are on a modestly declining trend. The current account deficit (CAD) narrowed to an estimated 18-year low of 1.4% of GDP in 2013, as the trade balance improved sharply. Fitch forecasts that the CAD will widen modestly in 2014-15 to around 2% of GDP as imports recover, but remain smaller than the historical norm of 4%-4.5% of GDP, and will be comfortably financed by inflows on the capital and foreign direct investment balances. A further mitigating factor is that 22% of Poland's external liabilities comprise intercompany loans, comparable with rating peers. A credible monetary and exchange rate regime (free float) and a lack of significant macroeconomic imbalances continue to support access to a USD34bn flexible credit line with the IMF. These factors helped the government to finance half its gross borrowing requirement by end-January on favourable terms. Nevertheless, the increase in the share of government securities accruing to non-resident investors to 41% from 33% following the OFE transfer poses a risk of market volatility should investor sentiment towards Polish assets deteriorate. This risk is mitigated by a reduction in issuance needs following the transfer. In Fitch's opinion, the Polish banking system represents a relative rating strength. The outlook for the banking sector for 2014 is stable, although there are incipient signs of improvement in the operating environment. Governance indicators are in line with the 'A' median and EU membership underpins political stability. However, per capita incomes are somewhat below the category medians. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. Nonetheless, the following risk factors individually, or collectively, could trigger positive rating action: - Material progress with fiscal consolidation that lowers the budget deficit and puts the public debt ratio on a clear downward path. - A sharper reduction in external debt ratios. - Sustained convergence of incomes towards EU and category medians. The following risk factors individually, or collectively, could trigger negative rating action: - A pronounced fiscal loosening that endangers the achievement of medium-term budget deficit and debt reduction targets. - Prolonged weak economic performance, resulting either from external or domestic shocks. KEY ASSUMPTIONS Fitch assumes that fiscal policy will be informed by the goal of exiting the EU's Excessive Deficit Procedure by the agreed deadline, which the EU Council has extended to 2015 (from 2014). Although a newly-introduced structural expenditure rule may help to ensure stable, low and counter-cyclical budgets in future, the agency deems the development of a track record essential in this regard before assessing any impact on sovereign creditworthiness. Fitch's debt sustainability analysis suggests that GGGD will be on a modestly declining path in the medium term, assuming gradually declining budget deficits. Fitch assumes that the constitutional court will not rule against the main provisions of the OFE reform. Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key macroeconomic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. It also assumes that the risk of fragmentation of the eurozone remains low. Contact: Primary Analyst Matteo Napolitano Director +44 20 3530 1189 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Kit Ling Yeung Analyst +44 20 3530 1527 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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