Fitch confirms Poland's rating at A- with stable outlook

Poland's long-term rating in foreign currency was affirmed at the A- level with stable outlook by global rating agency Fitch on Friday evening.

According to the agency, "Poland's ratings are supported by a diversified economy, a fairly sound macroeconomic framework anchored by EU membership, and slightly lower public debt levels than rated peers. This is balanced against lower governance indicators and income levels than the 'A' medians."

Among the factors that may lead to a rating downgrade, Fitch listed rapid increase in government debt, sizable deterioration in governance, potentially further weakening of relations with the EU and/or damaging macro-fiscal policy credibility, and erosion in competitiveness, potentially stemming from inflation entrenched at high levels and/or persistently higher energy prices.

According to Fitch, the rating could be improved if fiscal consolidation over the medium term led to a firm decline in government-debt-to-GDP ratio, evidence of higher sustained GDP growth prospects.

The agency assessed that the upcoming elections in Poland carry a risk of further fiscal pressures. Fitch noted plans to increase the childcare benefit to PLN 800 per month per child from early 2024 and indicated the possibility of further spending solutions with "no visibility on off-setting measures needed to avoid a permanent impact on public finances."

"We now expect the public deficit to fall only to 3.7 percent of GDP in 2024, which could lead to Poland being placed in the Excessive Deficit Procedure if EU fiscal rules are reinstated next year," Fitch wrote.

The agency believes the elections are unlikely to have a major impact on macroeconomic stability or Poland's attractiveness as an investment base, although there is the possibility of some market volatility around the vote.

"However, the results could be crucial in determining the status of Poland-EU relations, the pace of flow of EU funds, and general rule of law issues," it added.

According to the Fitch forecast, the Polish general government sector's deficit in 2023 will be at the level of 5.3 percent versus the 'A' median of 4.2 percent of the rating basket.

"Persistent primary fiscal deficits will push the public debt to GDP ratio to over 50 percent in 2023 and to 53 percent by 2027, the agency also said.

Fitch noted lingering uncertainty around the timeline of disbursement of Recovery and Resilience Facility (RRF) funds from the EU, given that a key milestone on judicial reforms is awaiting review in the constitutional court.

"We continue to expect that funds will be unlocked by end of this year (following elections), but risks are clearly rising that the authorities will be unable to tap all the funds if the process is further delayed," the agency said.

Mid-term growth is seen at 3-3.5 percent by the agency, "thanks to a combination of strong investment dynamics, high productivity and a normalisation of consumption trends as inflation eases."

Fitch previously confirmed Poland's rating on January 13, 2023, with the current rating in place since late 2007.

Poland has a two-notch set of ratings at 'A2' from Moody's and at the lower 'A-' from Fitch and S&P.

S&P declined to issue a scheduled report for Poland's sovereign rating on Friday, which means the rating holds at A- with stable outlook, the agency indicated in a statement on its website.

The Fitch rating review, which comes on the same day as the one by S&P, completes the spring round of reviews. The next rating review will come on September 22 from Moody's.