"The government's progress in fiscal consolidation in 2011, and plans for further deficit reduction in 2012, have eased prior downward pressure on Poland's rating," says Matteo Napolitano, Director in Fitch's Sovereign Group. "Poland's growth performance, macroeconomic resilience, credible monetary and exchange rate regime, financing flexibility and relatively strong banking sector also support its ratings."
Fitch forecasts that GDP growth will fall from 4.3% in 2011 to 2.8% in 2012, as economic activity in Poland's main trade partners and domestic demand slow. The balance of risks is tilted to the downside. However, Poland is likely to remain one of the strongest-growing countries in the EU in 2012.
Fitch expects Poland's general government deficit to narrow to 3.5% of GDP in 2012 from an estimated 5.4% in 2011 and 7.8% of GDP in 2010. This should be sufficient for Poland to exit the EU's excessive deficit procedure (EDP), and for public debt to embark on a modest downward trajectory after peaking at around 57% of GDP in 2011. Fiscal consolidation should also help reduce Poland's gross public borrowing requirement (GPBR) to 10% of GDP in 2012 from 12% in 2011. By February the government had financed around 40% of its gross borrowing requirement for 2012. Growth under-performance represents the single largest risk to the attainment of fiscal targets.
Key structural fiscal reforms announced by the government in November 2011 include raising the retirement age to 67 years for both men and women, abolishing certain pension privileges for uniformed services, and introducing a permanent fiscal rule with a view to reducing the budget deficit to 1% of GDP in the medium term. Although the timing of some of these measures is uncertain, Fitch assumes that a sufficient political consensus will form to allow their approval in 2012-13 with limited watering down. The domestic political climate is more conducive to reforms than before, and ongoing changes to EU economic governance will put an increased onus on fiscal rectitude.
Fitch continues to consider external finances as a relative weakness in Poland's sovereign profile. The agency forecasts that in 2012 Poland's gross external financing requirement will be around 150% of foreign-exchange reserves (FXR). This is a reflection of Poland's structurally large current-account deficit (CAD), which has contributed to a steady accumulation in net external debt (NXD) from 12% of GDP in 2000 to an estimated 39% in 2011. The availability of a flexible credit line (FCL) worth USD29bn, from the IMF mitigates external risks. The FCL expires in January 2013, but Fitch assumes that Poland would obtain an extension relatively easily, should it need to.
Fitch considers Poland's banking sector a rating strength, and that it poses little risk of contingent liabilities to the sovereign. The system capital adequacy ratio (CAR) was 13.1% of risk-weighted assets at the end of 2011. Nevertheless, bank external debt has increased to an estimated USD70bn (20% of the total) in 2011 from USD40bn in 2007. Additional pressures on eurozone parent banks to deleverage could increase the cost of rolling over external liabilities for some Polish subsidiaries.
Successful and sustained fiscal consolidation that reduces the budget deficit to a low level and puts the public debt-to-GDP ratio on a clear downward path could lead to positive rating action in the medium term. A material reduction in the CAD and external debt ratios would also be rating positive.
Conversely, significant divergence from fiscal targets and a failure to stabilise and then reduce the government debt ratio would put downward pressure on Poland's rating. A material deterioration in the eurozone debt crisis would impact Poland via trade, investment and financial channels and could lead to a negative rating action.
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