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Fitch Affirms Poland at 'A-'; Outlook Stable
January 13, 2017 / 9:08 PM / a year ago

Fitch Affirms Poland at 'A-'; Outlook Stable

(The following statement was released by the rating agency) PARIS/LONDON, January 13 (Fitch) Fitch Ratings has affirmed Poland's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'A-' with a Stable Outlook. The issue ratings on Poland's senior unsecured foreign- and local-currency bonds have also been affirmed at 'A-'. The Country Ceiling has been affirmed at 'AA-' and the Short-Term Foreign Currency IDR and Local Currency IDR have been affirmed at 'F2' and 'F1', respectively. KEY RATING DRIVERS Poland's 'A-' ratings are supported by its solid macro fundamentals, including a healthy banking system and sound monetary framework. Government debt (53% of GDP) is in line with the 'A' peers' median (52%) but weakened policy predictability since the 2015 political transition poses risks to the debt trajectory. Net external debt (31% of GDP in 2016) is high relative to the peers' median (-12%). GDP per capita has remained lower than peers, despite relatively strong GDP growth in recent years. Policy predictability and the political climate have deteriorated, adding to downside risks to Fitch's economic and fiscal forecasts. In 2016, the government implemented unorthodox measures, including a tax on banks, a cut in the retirement age (from 4Q17) and fiscal relaxation, despite high GDP growth. A number of reforms have led to tensions in the country and criticisms from abroad, including by the European Commission. The most recent example of increased political polarisation was the row over the vote of the 2017 budget in December, which opposition has described as illegal and has triggered large demonstrations. Fitch expects GDP growth will accelerate to 3.0% in 2017 and 3.2% in 2018 from 2.7% in 2016. Demand will benefit from acceleration in EU funds' disbursements, the fall in the unemployment rate (5.7% in October 2016 from 7.4% a year ago) and the ramp up in family 500+ social transfers. Uncertainties over demand from Poland's main trade partners in the EU (80% of total exports) and the potential negative impact of increased economic policy uncertainty and domestic political tensions on investment are the main risks to the outlook. The agency expects the government deficit will be 3.0% of GDP in 2017, up from an estimated 2.5% in 2016. The fall in 2016 one-off revenue (0.5% of GDP) will only be partially offset by stronger tax income and increased EU-fund related government investment will add to spending. Slower than expected GDP growth and weaker predictability of fiscal policy are the main risks that could lead to a higher deficit. Fitch's forecasts assume the 3% of GDP EU deficit criterion will remain a strong fiscal anchor. The country exited the EDP in 2015 following sustained fiscal consolidation and reopening it would damage policy credibility and potentially result in financial sanctions via reduced disbursement of EU funds. According to Fitch's debt dynamics analysis, government debt should peak at 54.6% of GDP in 2017 from an estimated 53% in 2016 and stabilise close to that level. This assumes some fiscal tightening after 2017, GDP growth slightly higher than 3%, a recovery in price growth towards 2.5% and a gradual increase in interest rates. Key risks to the debt trajectory are a failure to tighten fiscal policy in the medium term and exchange rate deprecation, with the share of foreign currency in central government debt at 34% in November 2016. The risk of a full conversion of CHF mortgage loans at a high cost for the banks has largely abated. The latest bill on CHF loans envisages compensation for the exchange rate spread charged to customers. The cost, although relatively high (a one-off PLN9.3bn according to the estimate by the Polish Financial Stability Authority, or lower if various amendments are made to the projects, versus PLN12.8bn for banks' profits in 2015), in Fitch's view would remain manageable for the banks. The banking system is well capitalised (17.6% as of September 2016), liquid and profitable, and the government has a material and growing ownership interest in it. In 2016, banks' profits were affected by the new tax on assets. Fitch expects the current account to have improved slightly, to -0.4% of GDP in 2016 from -0.6% in 2015 and -2.1% in 2014. This reflects primarily a stronger trade balance (based on data for the first three quarters of 2016). From 2017, the trade surplus will be affected by higher oil prices, stronger consumption, increased investment and lower global trade. This will lead to a rising current account deficit. Improved capital inflows from EU funds should support a gradual decline in net external debt, to 28.6% of GDP by 2018 from 31.4% in 2016. GDP per capita is still well below peers, although high GDP growth in recent years and economic integration within the EU have supported income convergence towards the EU average. Income per capita on a at purchasing power parity basis is closer to the peers' median. World Bank governance indicators are in line with the 'A' rated peers' median. 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 a 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 1.4% in 2017 and 2018, from 1.6% in 2016. 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 (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1017561 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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