September 6, 2017 / 4:34 PM / a year ago

Correct: Fitch Affirms Poland at 'A-'; Stable Outlook

(The following statement was released by the rating agency) PARIS/LONDON, September 06 (Fitch) This commentary replaces the version published on 7 July 2017 to correct the Applicable Criteria. Fitch Ratings, London, 06 September 2017: Fitch Ratings has affirmed Poland's Long-Term Foreign- and Local-Currency Issuer Default Ratings s at 'A-' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS Poland's 'A-' ratings reflect its solid macro fundamentals, supported by a sound monetary framework and healthy banking sector. The ratings are constrained by a weak level of GDP per capita relative to the peer median and high net external debt (34% of GDP in 2016 vs. -3% for the 'A' median). Government debt, at 54.4% of GDP at end-2016, is in line with the peer median. Fitch forecasts GDP growth will rise to 3.3% in 2017 from 2.7% in 2016. Household revenues are benefiting from a decline in unemployment (to a historical low of 4.8% in May) and increased transfers under the Family 500plus programme. The ramp up in disbursements of EU funds from 2017 will support investment, and Poland is benefiting from stronger growth in EU trading partners. GDP growth is set to decelerate slightly after 2017, to 3.2% in 2018 and 2019, in part reflecting the expected monetary policy tightening from 2018 and a slowdown in growth in the EU. Potential weaker than expected external demand is the main downside risk to the outlook. Higher than expected recovery in investment is the main upside risk. Monetary policy has remained accommodative in recent years as inflation was well below the central bank's 2.5% target. Inflation has accelerated to 1.5% y/y in May (based on Harmonized Index of Consumer Prices data) from -0.2% on average in 2016. The agency expects it will increase to 2.5% by end-2019 as the rise in domestic demand and lower unemployment translate into upward pressures on wages and prices. Fitch expects that higher inflation will lead to a gradual increase in the policy rate from 2018. Fitch expects the general government deficit will be 2.6% of GDP in 2017, up from 2.4% in 2016. The cost of increased transfers to families (+0.3% of GDP in 2017) and implementation of an earlier retirement age from October 2017 (+0.1% in 2017 and 0.5% in 2018) will largely be offset by a strong increase in revenue, reflecting the stronger economy and improved tax compliance (+30% y/y for VAT collection in the first five months of 2017). From 2018, the agency expects that the fiscal stance will remain accommodative with a deficit at 2.5% of GDP in 2018 and 2019. The agency expects that government debt, at 54.4% in 2016, should remain stable in 2017 and gradually decline thereafter, assuming some fiscal tightening, real GDP growth slightly higher than 3%, a recovery in inflation towards 2.5% and a gradual increase in interest rates. Given the high share of debt in foreign currency (32% of total state treasury debt in April 2017), a key risk to the debt dynamics is currency depreciation. The authorities aim to reduce the share of foreign debt to below 30% of the total by 2020. Tensions with the EU have moderated relative to 2016. The escalation of the "rule of law" procedure, launched by the European Commission in early 2016, seems to have halted in recent months. Potential tensions with the EU and the departure of the UK from the bloc could affect the discussion on the EU budget and the country's allocations for the next EU financial perspective (2021-2027). This would possibly reduce inflows to Poland, the current largest recipient of EU funds, over the medium term. Local elections at end-2018 will be a test for the ruling party, which has led in the polls since its electoral victory in 2015. The next general election is due in 2019. The banking system is well capitalised (17.7% as of end-2016), liquid and profitable. Various policies are under discussion to support CHF mortgage borrowers (18% of total loans to households, 6% of GDP). Fitch believes potential costs for the banks would be limited and manageable. Policies considered include compensation for the exchange rate spread, incentives for voluntary restructurings including higher capital requirements for CHF loans, and relaxing eligibility criteria to an existing fund financed by banks to support distressed borrowers. The current account deficit reduced to 0.2% of GDP in 2016 from 0.6% in 2015, reflecting strong growth in exports and low domestic investment in 2016. The agency expects that the current account deficit will increase from 2017 as domestic demand ramps up. Combined with capital inflows, including continuing grants from the EU, this should remain consistent with a gradual decline in net external debt, to 27% of GDP by 2019 from 34% in 2016. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Poland a score equivalent to a rating of 'A' on the Long-Term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - External finances: -1 notch, to reflect the high net external debt relative to the peers. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. Nonetheless, the following risk factors could, individually or collectively, trigger negative rating action: - Any sign that the relevance of the 3% of GDP EU deficit criteria weakens as a fiscal anchor, or failure to tighten fiscal policy in order to stabilise the debt-GDP ratio in the medium term. - Weaker macro-economic policy framework potentially resulting in deterioration in the investment climate, macro instability and lower GDP growth. The following risk factors could, individually or collectively, trigger positive rating action: - Continued high GDP growth that supports income convergence towards the 'A' category median. - Continued reduction in external debt ratio supported by stronger current account balances and non-debt capital inflows. KEY ASSUMPTIONS Fitch assumes that economies in the eurozone, Poland's main economic partners, will grow 2.0% in 2017, 1.8% in 2018 and 1.4% in 2019 from 1.6% in 2016. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'A-'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'F2' Short-Term Local-Currency IDR affirmed at 'F1' Country Ceiling affirmed at 'AA-' Issue ratings on long-term senior-unsecured foreign-currency bonds affirmed at 'A-' Issue ratings on long-term senior-unsecured local-currency bonds affirmed at 'A-' Contact: Primary Analyst Arnaud Louis Director +33 1 44 29 91 42 Fitch Ratings S.A.S. 68 rue de Monceau 75008 Paris Secondary Analyst Paul Gamble Senior Director +44 20 3530 16 23 Committee Chairperson Tony Stringer Managing Director +44 20 3530 12 19 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Country Ceilings - Effective from 16 August 2016 to 21 July 2017 (pub. 16 Aug 2016) here Sovereign Rating Criteria - Effective from 18 July 2016 to 21 July 2017 (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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