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WARSAW, May 12 (Reuters) - Ratings agency Moody's Investors Service revised the outlook on Poland's A2 issuer rating on Friday to stable from negative, citing reduced risks of loose fiscal policy and a lack of material deterioration in the investment climate under the country's right-wing government.
The move reversed Moody's decision to revise the outlook lower in May 2016 and came after peer ratings agency S&P in December revised the outlook on its BBB+ rating upward to stable from negative.
"The primary driver ... is Moody's expectation that the downside risks to the fiscal stance that led to the negative outlook one year ago are abating," the agency said, affirming the issuer rating at A2.
The government of the right-wing Law and Justice (PiS) party, which came to power in 2015, narrowed the fiscal deficit in 2016 to 2.4 percent of gross domestic product (GDP) from 2.6 percent in 2015, despite a significant increase in social spending.
PiS launched in 2016 a child benefit worth about 1 percent of GDP and passed legislation to reduce the retirement age starting from late 2017, but improved tax collection as well.
The government now expects the deficit to widen to 2.9 percent of GDP in 2017, but wants to keep it below the European Union ceiling of 3 percent of GDP going forward.
Moody's also said the investment climate in Poland under the PiS-led government did not deteriorate significantly. Expectations of such a deterioration was one of the factors behind Moody's decision to lower the rating outlook last year.
"Despite some increase in policy uncertainty post-2015 elections, the evidence does not suggest that the investment climate has materially weakened," Moody's said.
The European Commission has accused the PiS government of undermining democracy and rule of law following the party's overhaul of the constitutional tribunal that made it more difficult for the court to block new legislation.
In early 2016 S&P cut Poland's sovereign rating to BBB+, saying the PiS government had weakened key institutions, particularly the constitutional tribunal.
A third major rating agency, Fitch has not altered its rating on Poland since PiS came to power in 2015, keeping it at A- with a stable outlook.
Growth of Poland's $468 billion economy slowed last year to 2.8 percent from 3.9 percent in 2015, partly due to reduced inflows of EU aid.
But blistering growth in Polish industrial and construction output and retail sales in March prompted at least four commercial banks to raise their economic growth forecasts for eastern Europe's biggest economy Poland.
The Finance Ministry expects growth to accelerate to 3.6 percent this year. (Reporting by Marcin Goettig, editing by G Crosse)