Moody's Investor's Services confirmed Poland's rating but cut its outlook to negative on Saturday, citing rising fiscal risks and the conservative government's shift to more unpredictable policies and legislation. Just over half the analysts polled by Reuters expected the move after fellow rating agency Standard and Poor's rattled investors with a downgrade in January, saying the new government's policies eroded the independence of institutions such as the top court.
In contrast, Moody's said Poland's economic resilience and a track record of robust growth underpin the A2 rating, the highest of the three major agencies. The affirmation will probably lift the Polish zloty and bonds in the coming days, the finance minister said. Nearly half of economists polled forecast a downgrade. Moody's noted "fiscal risks arising from a substantial increase in current expenditures ... as well as the government's intention to lower the retirement age."
Since coming to power in October, the eurosceptic Law and Justice (PiS) party has raised budget spending by over 7 percent, passing a new child benefit programme worth about 1 percent of gross domestic product in 2016 alone. Finance Minister Pawel Szalamacha told reporters on Saturday that while he agreed with Moody's decision on the rating, the outlook cut was "over-cautious, burdened with some pessimism".
Poland would further raise spending in line with a planned increase in tax revenue, he said. The new child benefit is financed mostly by a one-off source of budget revenue this year. Many economists remain sceptical the government will be able to improve tax collection, given unsuccessful efforts by previous governments.
Poland, a member of the European Union since 2004, says it aims to observe the EU fiscal deficit ceiling of three percent of GDP next year and to reduce that gap to 1.3 percent by 2019. Moody's said the government's shift towards more unpredictable policies and legislation could hurt investment. "(This is) reflected in the ambiguity with respect to the conversion of foreign-currency denominated mortgages and in the prolonged stalemate between the government and the ... constitutional court," Moody's said.
The PiS party has promised to help thousands of Poles who took out loans in Swiss francs when the franc was relatively cheap. Aides to President Andrzej Duda, an ally of PiS, are working on proposals to solve the problem. PiS has also tried to reform the constitutional court in ways that critics say make it hard for judges to review, let alone challenge the ruling party's legislation. Moody's said it could cut Poland's rating if the state's fiscal position or the investment climate worsen.
"A protracted (or escalation in the) conflict between the government and the constitutional court that leads to substantial capital outflows could also exert downward pressure on the rating," Moody's said. Moody's has held Poland's A2 rating stable since 2002, when the country was much poorer and more corrupt than it is today. S&P currently rates it two notches lower at BBB+, outlook negative. Fitch is one notch lower at A-, outlook stable.