Fitch Affirms Poland at 'A-'; Outlook Stable

Fri Aug 8, 2014 4:24pm EDT

(The following statement was released by the rating agency) LONDON, August 08 (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: A relatively robust and increasingly domestic demand driven economic recovery is underway. Fitch forecasts GDP growth of 3.4% in 2014, despite a soft patch in 2Q. Fitch projects a mild acceleration in growth in 2015-16, as the economic performance of Poland's key EU trading partners improves and fiscal drag gradually recedes. Fitch's forecast implies a closing of the gap with 'A' peers on this metric. Nevertheless, downside risks prevail and mainly relate to uncertainties surrounding the level and extent of US and EU sanctions against Russia and their broader macroeconomic effects. Stronger economic growth, increased flows to the budget from the downsizing of the open pension funds (OFEs), and some further structural consolidation should allow the general government deficit (GGD) to fall to 3.2%-3.3% of GDP in 2014 from 4.3% in 2013. Including the transfer of government bonds from OFEs, general government accounts (ESA95, to be replaced by ESA2010 later in 2014) will record an estimated surplus of 4.7% of GDP. Fitch projects GGDs of 2.8% and 2.6% of GDP in 2015 and 2016, respectively, which would allow Poland to exit the EU's Excessive Deficit Procedure, as well as bring it closer to the 'A' median (2.2% in 2013). The OFE transfer will engender a one-off drop in Poland's gross general government debt (GGGD) to an estimated 48.7% of GDP in 2014 from 57.1% in 2013. Fitch has previously noted that it considers this development to be rating neutral, given the corresponding rise in long-term public pension liabilities. Nevertheless, on current trends, the GGGD gap between Poland and the 'A' median will be closed in 2015-16. Fitch forecasts that Poland's net external debt (NXD) ratios will continue to decline gradually in 2014-16, driven by current-account deficits (CADs) below the historical norm of 4.0%-4.5% of GDP. External debt ratios will remain well above peers, mitigated by the substantial share (one-quarter) of intercompany loans. A credible monetary and exchange rate regime (free float) and a lack of significant macroeconomic imbalances underpin access to financial markets on favourable terms. By late July, the government had financed virtually its entire gross borrowing requirement for 2014. An increase in the share of government securities accruing to non-resident (NR) investors to 41% from 33% following the OFE transfer increases Poland's vulnerability to a reversal in market sentiment. However, the NR investor base is relatively diversified, mitigating this source of risk. Fitch considers that the flexible credit line with the IMF, worth USD34.5bn, provides an additional buffer against the risk of increased financial market volatility as extraordinary global monetary stimulus is gradually withdrawn. In Fitch's opinion, the Polish banking system continues to represent a rating strength. The sector is well-capitalised, liquid and profitable, and private sector credit was growing by around 6% year on year (11% zloty-denominated) in May 2014, providing a measure of support to household consumption. Governance indicators are in line with the 'A' median and EU membership underpins political stability. 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: - Sustained convergence of incomes towards EU and category medians. - Greater confidence that a track record of low budget deficits is being established. - A more marked reduction in external debt ratios. 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, that halts income convergence or endangers the stability of public finances. KEY ASSUMPTIONS Fitch assumes that fiscal policy will be conducted in line with the goal of exiting the EU's Excessive Deficit Procedure by the 2015 deadline, and subsequently by the Stabilising Expenditure Rule. Fitch assumes that the constitutional court will not rule against the main provisions of the OFE reform. Contact: Primary Analyst Matteo Napolitano Director +44 20 3530 1189 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Eugene Chiam Associate Director +44 20 3530 1512 Committee Chairperson Douglas Renwick Senior Director +44 20 3530 1045 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. 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