Dagong Maintains Sovereign Credit Ratings for Poland at A and A- with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
September 29, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided today to maintain both the local and foreign currency sovereign credit ratings for the Republic of Poland (“Poland”) at A and A-, each with a stable outlook. Poland’s economy is growing steadily. Ongoing fiscal consolidation over the medium term will help alleviate the government’s debt pressure, ensuring stable government solvency. Nevertheless, the country‘s foreign currency debt repayment ability is impaired by prominent external vulnerability, rendering Poland’s government solvency in foreign currency slightly lower than that in local currency.
The main reasons for maintaining the sovereign credit ratings of Poland are highlighted as follows:
1. Poland’s repayment environment faces pressure. The ruling Law and Justice party retaining its majority of parliamentary seats and a relatively high and steady approval rating both ensure a stable political situation at home. Although the government has struggled to implement tax cuts and improve people’s livelihood, policies including the expansion of judicial powers, national protectionism and a lowering of the country‘s retirement age all meet objections among pro-Europeans and the European Union. Moreover, Poland's opposition to the refugee quota plan and support for Ukraine has damaged its relationship with the EU and Russia, thus increasing geopolitical risks. In terms of credit environment, the country‘s accommodative monetary policy increases domestic credit supply and the banking system remains sound.
2. Domestic demand has shored up a steady pickup in the Polish economy in the short term, showing some growth potential in the medium to long term. In the short term, benefitting from welfare policies such as raising minimum wage and increasing tax exemption for low-income tax payers, the household sector wields greater purchasing power, contributing to vigorous consumption. Cutting corporate income tax rates for small businesses promotes private investment. Due to the effective use of The European Structural and Investment Funds, contraction in the construction industry will come to an end and thereby infrastructure construction can be further advanced. Therefore, the country‘s growth rate is estimated to increase to 3.4% in 2017 and 3.2% in 2018. In the medium and long term, Poland is facing structural problems, including population aging. However, considering its sound industrial base, obvious labor cost advantages, and improvements in education and employment of the eastern part having helped facilitate the coordinated development between eastern and western regions of the country, Poland’s average economic growth rate over the medium to long term is estimated to hover around 3.4%.
3. Though fiscal deficit goes up slightly in the short term, the government’s strong financing capability will keep sources of repayment stable. In the short term, the government has postponed a reduction in the VAT rate until the end of 2018, and strengthened VAT collection, which will result in a modest increase in fiscal revenues. However, fiscal pressure will increase following the government‘s decision of lowering the country‘s retirement age and aiming for higher EU-funded capital spending. As a result, Poland’s fiscal deficit is projected to expand to 2.8% in 2017 and 3.1% in 2018, with government financing needs reaching 7.6% and 9.5% of GDP correspondingly. In the medium term, thanks to the canceling of VAT tax incentives and an improvement in tax collection, government finances are expected to exit the Excessive Deficit Procedure (EDP). International financing capability could be ensured by good growth prospects and loose monetary policies at home and abroad, which will further help stabilize the government’s sources of repayment.
4. The government solvency in local and foreign currency will remain stable. With the fiscal deficit widening in the short term, government debt as a percentage of GDP is expected to increase to 54.7% in 2017 and 55.1% in 2018. Nonetheless, a reasonable debt maturity structure and lower financing costs could stabilize government solvency in local currency. In 2016, Poland’s gross external debt burden rose to 71.6% of GDP and international reserves merely covered 34.2% of the total external debt, which underlined external vulnerability and rendered Poland’s government solvency in foreign currency slightly lower than that in local currency. In the short term, Poland‘s capital account surplus is able to cover the current account deficit, the Polish zloty is appreciating gradually, and external financing channels are expected to remain smooth, which will all together secure the repayment of foreign debts.
In the short term, though Poland’s repayment environment is undermined, the country‘s fiscal deficit is slightly widening, although the inner driver for growth is getting stronger and government solvency can be guaranteed by relatively low financing costs under a loose monetary environment, a rational debt structure, and a stronger Polish zloty. In this regard, Dagong has decided to maintain a stable outlook for the local and foreign currency sovereign credit ratings of Poland for the next one to two years.