The newly assigned Prime-1 rating for Poland's short-term debt is driven by Poland's improved liquidity position that has seen cash reserves increase steadily since 2008 while the stock of short-term outstanding debt has declined markedly to under 1% of GDP by the end of 2011 from around 4% in 2008, said the agency. Both the short-term rating and the existing A2 government bond rating reflect a relatively large economy and balanced growth, which have provided an important degree of stability throughout the global financial crisis. Even though Poland's GDP per capita is lower than that of other Central European countries, the country's economic growth has strongly outperformed peers since 2008 (Poland was the only country in the EU to have positive GDP growth in 2009). This performance has allowed it to close most of the gap that emerged during the 2004-07 boom, when Poland grew more slowly than the regional average. Moody's expects that Poland's GDP growth will remain positive, even as the risk of recession among major western European countries intensifies.
Moody's notes that fiscal consolidation remains a key theme for Poland in 2012-13. Macroeconomic policymaking has contributed to a reduction in the volatility of real GDP growth over the past decade but now faces significant challenges as the euro area enters a crucial stage in the ongoing crisis. In particular, fiscal policy will need to balance the conflicting objectives of supporting the economy and meeting deficit reduction targets through 2013.
Poland's government financial strength is supported by the financial system's ability to provide financing to the sovereign, thereby increasing its funding flexibility in the domestic market. Legal limits are in place to keep the debt/GDP ratio below the Maastricht criterion of 60%, although government debt ratios remain above 'A' category medians.
According to Moody's, Poland's external finances point to vulnerabilities, with external debt/GDP exceeding peer medians. Although reserve levels are low compared to yearly external debt service, a flexible exchange-rate regime and access to the IMF's Flexible Credit Line (FCL) serve as important shock absorbers. These two elements mitigate Moody's concerns over the strength of external finances in Poland relative to 'A' category peers.
WHAT COULD MOVE THE RATING UP/DOWN
Moody's would consider potentially upgrading Poland's long-term rating if the government's financial strength improves to the extent that the structural budget deficit is eliminated and debt ratios sustainably decline, resulting in a significant strengthening of the government's balance sheet. Upward pressure on the ratings could also result from a reduction in external vulnerabilities through a sustainable narrowing of the current account deficit and a strengthening of the country's external finances over the medium term.
Both the A2 and Prime-1 ratings could potentially experience downward pressure in the event of significant fiscal slippage that would jeopardize consolidation targets and lead to a further deterioration in debt dynamics, thereby impairing the government's financial strength. Moreover, Moody's would also view negatively any failure to implement recently announced reforms aimed at boosting competitiveness and potential growth prospects.
The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
See the entire release here.