Research Update:
Republic of Poland Ratings Affirmed; Outlook Stable
Primary Credit Analyst: Benjamin J Young, London (44) 20-7176-3574; [Link]@[Link] Secondary Contact: Kai Stukenbrock, Frankfurt (49) 69-33-999-247; [Link]@[Link]
Table Of Contents
Overview Rating Action Rationale Outlook Key Statistics Related Criteria And Research Ratings List
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Research Update:
Republic of Poland Ratings Affirmed; Outlook Stable
Overview
Poland's economy has robust fundamentals and strong growth potential. Significant pension system reform is likely to help reduce government debt and ongoing fiscal expenditures. However, it also increases the government's implicit pension liability and indicates to us that policy predictability has lessened. We are therefore affirming our 'A-/A-2' foreign and 'A/A-1' local currency ratings on Poland. The outlook is stable, reflecting our view of balanced risks to the ratings.
Rating Action
On Feb. 7, 2014, Standard & Poor's Ratings Services affirmed its 'A-/A-2' long- and short-term foreign currency and 'A/A-1' long- and short-term local currency sovereign credit ratings on the Republic of Poland. The outlook is stable.
Rationale
The rating on Poland is supported by its strong, increasingly open and competitive economy. We estimate GDP per capita will be just over $14,000 in 2014. The Polish economy benefits from a floating exchange rate regime and deep domestic capital markets that permit the government to finance itself in local currency at long-dated maturities. Although we anticipate that implementing pension reform and a recent cabinet shake-up will introduce some policy uncertainty and volatility in the run-up to the 2015 parliamentary elections, we do not view this as evidence of a significant divergence from the economic policies that have resulted in a stable macroeconomic environment. Pension reform will slightly reduce short-term pressures on tight public finances by increasing headroom under the constitutional public debt limit. We expect that changes in fiscal rules--including lower activation thresholds--that have been brought in as Poland reduces its debt stock, combined with increased risk aversion and market scrutiny, will limit any slippage. We expect Poland's current account deficit to be about 2.5% of GDP in 2014 and 2015, mainly financed by improving foreign direct investment (FDI) flows. We estimate that Poland's economy grew at a reduced pace of 1.5% in 2013, chiefly supported by its resilient exporting sector, while consumption growth
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remained weak and investment growth negative. External weaknesses persisted through the year, but growing trade links with non-European partners supported export growth. Meanwhile, import demand remained subdued. In our base case, we expect domestic demand to improve over 2014 and to gradually replace net exports as the core contributor to growth. Poland's economy is increasingly open--the export of goods and services now accounts for nearly 50% of GDP, up from 40% in 2008. Further diversification of export markets should help Poland to attract further investment. High frequency indicators show resumed consumer and industrial confidence. We expect this to trigger annual real GDP growth of about 2.7% in 2014, and an average of 3.9% between 2015 and 2017. Poland's public finances will be significantly affected by the recently implemented pension reform. The treasury bonds held at the privately managed second-pillar pension funds (OPFs) have been transferred to the state-run social security administration (ZUS) and cancelled. The corresponding pension liabilities have also been transferred to ZUS. The reform does not affect holdings of equities and non-government bonds by the OPFs. Payments into the second-pillar funds have been mandatory since their introduction in 1999. The funds were subject to explicit government regulation regarding contribution rates and investment limits. The pension reform does not affect investments in the voluntary third pillar of the pension system. We understand that the constitutional court will likely give its opinion on the measures over the next few months--post implementation--which could cause some uncertainty as to the final outcome of the reform. In any case, the government's pension reform has somewhat weakened policy continuity and predictability, in our view. We expect pension reform to reduce the government's net debt burden by about 8% of GDP to 46% in 2014. However, the government's implicit pension liabilities will simultaneously increase by a similar amount. Depending on the voluntary participation rate in the reform, annual transfers to ZUS from the budget are expected to reduce by approximately 0.5% of GDP (annual transfers will proportionally reduce with those who opt-out of OPF contributions). In our view, the decision to transfer pension assets to the state system was partly motivated by tight public finances. Poland's debt stock had been close to the constitutional limit of 60% of GDP. Although the reform will reduce overall debt, it will also increase the proportion of Polish government debt denominated in foreign currencies to an estimated 34% of the total from 31%. The proportion of general government debt held by nonresidents will rise to an estimated 57% from 51%. These changes will reduce the depth of the domestic debt market. Combined with increased risk aversion in international investors and U.S. federal monetary policy, we expect the government's vulnerability to higher or more-volatile debt servicing costs to increase. We therefore expect the government to maintain close control of its fiscal consolidation program, which aims to reduce the deficit to 3% by 2015. Recognizing these concerns, the government has already
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financed nearly 50% of its 2014 gross financing needs, which are some 15% lower as a result of the pension asset transfer. We base our fiscal flow analysis on the underlying deficit, excluding the one-off effect of the asset transfer. We expect a deficit in the region of 3.8% of GDP in 2014, narrower than the expected 4.3% of GDP deficit in 2013. The government has also lowered the trigger point for its fiscal rules (which have also been overhauled), in line with its reduced debt stock. This provides a reference point for future structural fiscal performance. We expect structural fiscal performance will improve in line with economic growth. A prolonged deterioration in external sentiment could put Poland's ability to finance its net external liabilities at risk; these are over 70% of GDP. We estimate that gross external financing needs will comprise more than 90% of current account receipts (CARs) and useable reserves until 2017. Although more-stable FDI-related liabilities comprise about half of external liabilities, public sector external debt comprises 100% of CARs or 50% of GDP. Because of capital account flows, FDI, and other equity funding, narrow net external debt (external debt net of reserves, plus financial sector assets) is lower, at approximately 55% of CARs. We expect external flows to remain stable and the current account deficit to remain relatively stable, although a slight widening is possible as import demand rises. Having said that, we expect any increase in foreign exchange volatility to be a temporary deviation from market expectation of a longer-term nominal appreciation; Poland's growth prospects remain strong and we anticipate that its external imbalances will remain steady and predominantly FDI-financed going forward. Poland benefits from some important buffers that should help to keep external borrowing costs down. These include a flexible exchange rate regime, which helps the National Bank of Poland pursue an independent monetary policy. Poland has also renewed a flexible credit line (FCL) of $34 billion with the International Monetary Fund; this will now expire at the end of 2015. Poland has not yet drawn any funds from the FCL and we do not expect it to do so during the life of the facility.
Outlook
The stable outlook reflects our assessment of balanced risks to the ratings. Poland benefits from strong economic fundamentals and growth prospects, but its economy remains vulnerable to external volatility and its public finances remain under pressure. Should Poland experience an extended period of economic expansion, leading to a sustained increase in levels of prosperity and stronger public finances without weakening external indicators, we could raise the sovereign ratings. We could lower the ratings should Poland's fiscal or external performance slip or if we see additional policy measures that might lead us to re-assess our view of institutional effectiveness and policy predictability.
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Key Statistics
Table 1
Republic of Poland - Selected Indicators
2007 Nominal GDP (US$ bil) GDP per capita (US$) Real GDP growth (%) Real GDP per capita growth (%) Change in general government debt/GDP (%) General government balance/GDP (%) General government debt/GDP (%) Net general government debt/GDP (%) General government interest expenditure/revenues (%) Oth dc claims on resident non-govt. sector/GDP (%) CPI growth (%) Gross external financing needs/CARs +use. res (%) Current account balance/GDP (%) Current account balance/CARs (%) Narrow net external debt/CARs (%) Net external liabilities/CARs (%) 425 11,151 6.8 6.9 2.0 (1.9) 45.0 40.6 5.7 39.4 2.6 118.4 (6.2) (13.6) 45.4 123.9 2008 529 13,890 5.1 5.2 5.6 (3.7) 47.1 43.2 5.6 49.6 4.2 119.2 (6.6) (14.8) 48.3 102.7 2009 431 11,300 1.6 1.6 6.2 (7.5) 50.9 46.7 7.1 50.4 4.0 110.1 (4.0) (9.1) 70.2 147.6 2010 470 12,309 3.9 3.8 6.6 (7.9) 54.9 51.1 7.2 51.9 2.7 103.9 (5.1) (11.1) 64.9 144.5 2011 516 13,386 4.5 3.5 5.4 (5.0) 56.2 52.5 7.0 54.8 3.9 102.2 (5.0) (10.2) 54.1 112.9 2012 490 12,711 1.9 1.9 1.7 (3.9) 55.6 51.7 7.4 53.8 3.7 98.1 (3.7) (7.3) 63.8 137.5 2013e 512 13,291 1.5 1.5 4.0 (4.3) 58.3 54.5 7.4 54.3 0.9 92.9 (2.3) (4.3) 59.5 132.8 2014f 545 14,127 2.8 2.6 (5.7) 4.5 50.1 46.5 5.9 54.7 1.7 92.6 (2.1) (3.9) 55.8 143.6 2015f 586 15,185 3.5 3.5 3.3 (3.3) 50.8 47.4 5.7 54.9 2.3 93.5 (2.7) (4.8) 52.4 147.2 2016f 622 16,117 4.0 4.0 2.9 (2.9) 50.7 47.5 5.5 55.4 2.5 94.4 (3.1) (5.5) 48.9 139.4 2017f 663 17,170 4.2 4.1 2.6 (2.6) 50.2 47.2 5.1 55.6 2.5 94.8 (3.5) (6.0) 46.0 131.6
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. CARs--Current account receipts. The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Ps independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.
Related Criteria And Research
Related Criteria
Sovereign Government Rating Methodology And Assumptions, June 24, 2013 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Criteria For Determining Transfer And Convertibility Assessments, May 18,
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2009
Related Research
Sovereign Defaults And Rating Transition Data, 2012 Update, March 29, 2013
In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see above). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the Rating Committee are summarized in the above rationale and outlook.
Ratings List
Ratings Affirmed Poland (Republic of) Sovereign Credit Rating Foreign Currency Local Currency Transfer & Convertibility Assessment Senior Unsecured Senior Unsecured Short-Term Debt
A-/Stable/A-2 A/Stable/A-1 A+ A AA-1
Additional Contact: SovereignEurope; SovereignEurope@[Link]
Complete ratings information is available to subscribers of RatingsDirect at [Link] and at [Link]. All ratings affected by this rating action can be found on Standard & Poor's public Web site at [Link]. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44)
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20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.
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