Moody's Downgrades Poland's Rating Amid Lack Of Fiscal Consolidation

(MENAFN- ING) Moody's decision is a warning signal for politicians mainly

The financial market reaction to Moody's decision has been muted, which is hardly surprising. Investors have been closely monitoring Poland's fiscal position and had already priced 1–2 notches of a downgrade. This was reflected, among other things, in 1) the highest asset swap spreads in the region, unusual for a sovereign rated A2, and 2) the historically low share of foreign investors in government bond holdings, which has been consistently decreasing for over a decade.

It is worth recalling that Poland's sovereign rating has been on an upward trajectory since the 1990s, reaching its peak in the middle of the previous decade. The first downgrade in 2016 (reverted shortly after), by S&P, reflected concerns over the deterioration in the country's institutional framework and the rule of law. The latest downgrade by Moody's, in turn, reflects years of high fiscal deficits, rising public debt and the lack of a clear path towards fiscal consolidation in Poland's policy mix. In its statement, Moody's highlighted a weakening in the effectiveness of fiscal policy. Expansionary fiscal policy was maintained despite favourable economic conditions, while fiscal buffers were not rebuilt. Political constraints are also an obstacle to fiscal consolidation.

Moody's decision sends a warning signal mainly to both the politicians and the public. In our view, Poland's public finance needs around 4% of GDP adjustment to prevent the debt from rising and clearer expenditure prioritisation, neither of which is apparent in the proposals being put forward by various political parties as the election campaign gets under way.

Rating agencies views on Poland Source: S&P, Fitch, Moody's

"> Solid growth potential recognised by investors

Still, the economy presents impressive growth potential, which is clearly illustrated by the behaviour of foreign investors, who tend to take a particularly critical view of economic fundamentals. Their share of turnover on the Polish equity market has continued to rise and has now exceeded 70%. At the same time, as noted above, their holding in the Polish government bond market has been declining. Foreign investors now hold only around 12% of Polish government debt, the lowest share in Central and Eastern Europe.

Moody's return to a stable outlook reduces the risk of another downgrade. The post-election fiscal landscape will be key

Moody's decision brings its assessment of Poland's long-term rating in line with other two major rating agencies, Fitch and S&P, although Fitch is now the only one of the three to maintain a negative outlook. In Moody's case, the return to a stable outlook is likely to temporarily reduce the risk of another downgrade, but in our view, only for a limited period. The issue could return to the fore after the 2027 parliamentary election if the new government fails to deliver meaningful fiscal tightening.

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