DBRS Assigns “A” Rating to Republic of Poland

DBRS, Inc. has assigned long-term foreign and local currency issuer ratings of A to the Republic of Poland. DBRS has also assigned short-term foreign and local currency issuer ratings of R-1 (low). The trend on all ratings is Stable.

The A rating reflects Poland’s strong macroeconomic performance, its solid fiscal and monetary policy framework and flexible exchange rate regime. Challenges to the ratings are uncertainty over new government policies, Poland’s relatively low GDP per capita, high external debt and ageing demographics.

The Stable trend reflects DBRS’s assessment that risks to the ratings are broadly balanced. A reduction in the structural deficit combined with a steady decline in public debt could put upward pressure on the ratings. In addition, addressing labor market challenges, infrastructure enhancements and further improvements in business conditions would be positive for the credit profile. On the other hand, the ratings could be lowered if the fiscal stance weakens, leading to a marked deterioration in public debt dynamics. Similarly, following the October elections, a less predictable policy framework or weaker economic performance could put downward pressure on the ratings.

Poland’s ratings are underpinned by its solid macro-economic performance with overall GDP growth averaging 3.0% over the last five years supported by a strong policy framework including a credible inflation targeting regime and a flexible exchange rate policy. DBRS expects economic growth to remain robust in 2015-2017, at 3.5% on average, driven predominantly by domestic demand supported by low inflation, an improving labor market, low interest rates and the anticipated fiscal loosening to be implemented by the new government.

Poland has made improvements in fiscal consolidation. The headline deficit declined to 3.3% of GDP last year (including 0.4% of GDP in pension reform expenditure) from 4.0% in 2013, enabling the country to exit from the European Union excessive deficit procedure. DBRS expects the 2015 general government deficit to be slightly less than 3% of GDP, but to shift slightly above 3% starting in 2016 following the implementation of the new government’s fiscal measures. The newly elected government plans to increase state-directed activities. New taxes on financial institutions and super-markets and higher tax compliance would pay for measures such as increasing child benefits. DBRS believes that any loosening in the fiscal stance would be limited by Poland's fiscal framework including the domestic debt rules, the stabilizing expenditure rule and compliance with EU debt and deficit criteria.

Government debt is moderately high but sustainable. Public debt also declined by 5.5 percentage points of GDP to 50.4% of GDP in 2014, largely as the result of changes to the 2013 pension reform. DBRS expects debt dynamics to remain stable at around 50% of GDP through the end of the decade. Debt dynamics would be supported by a favorable growth-interest rate differential, which would more than offset a small, but sustained primary deficit position. The composition of the public debt profile also mitigates exchange rate and refinancing risks. Two-thirds of public debt are denominated in local currency, and one-third in foreign currency, of which more than 70% is denominated in euros. This presents a risk as the total foreign exposure rises to 56.7%, if one includes the share of local currency debt held by non-residents. However, these risks are partly mitigated by Poland’s diversified investor base, its strong macroeconomic fundamentals and high foreign exchange reserves. The $22 billion Flexible Credit Line (FCL) arrangement with the International Monetary Fund provides additional insurance against external shocks.

Despite its resilience since 2008-09, the Polish economy faces several challenges. These include (1) Labor market trends both in terms of unfavorable demographics, as well as insufficient geographic and vocational mobility, (2) Bottlenecks in transport, energy and communication networks, and (3) A cumbersome business environment in many areas such as taxation. Successful reforms that addressed these areas would likely be required to raise Poland’s GDP per capita, which is currently below the EU average.

In addition, DBRS views some risks from the uncertainty surrounding Poland's pace of macroeconomic and fiscal consolidation following the elections. Some of the planned measures announced by the government, such as additional taxation on the banking system and supermarkets, may dampen investor confidence, which in turn could hinder Poland's strong economic performance. However, DBRS does not expect that Poland will deviate significantly from the sound economic management of the past, although the pace of fiscal consolidation may slow over the medium term, and certain sectors such as the banking sector may face additional taxes. On the monetary policy framework front, the terms of eight of ten monetary policy committee members’ terms are expiring, allowing for the first time all members to be selected by the representatives of only one political party which could raise questions on policy objectivity.

Poland’s high external debt at over 70% of GDP in 2015 and large gross financing needs also weigh on the ratings. However, these vulnerabilities are mitigated by the high share of the relatively stable intercompany debt, typically a more stable source of financing, the availability of the IMF’s $22 billion FCL arrangement which would be sufficient to finance Poland’s current account deficit and the fact that Poland is the biggest beneficiary of EU funds. DBRS expects the continued resilience of Poland’s external finances should ensure that Poland’s external obligations will be rolled over in full.

In common, with most European countries, Poland faces additional long-term challenges on its fiscal position arising from unfavorable demographic trends. As per the European Commission 2015 Ageing Report, Poland's working age population (15-64 years), as a proportion of the total population, will decrease from 71% in 2013 to 54% in 2060. Rising off-balance-sheet liabilities due to a rapidly aging population and healthcare costs highlight the need of future social security reforms

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

The sources of information used for this rating include Poland Ministry of Finance, National Bank of Poland, Central Statistics Office of Poland, International Monetary Fund, European Commission, European Central Bank, Statistical Office of the European Communities, Croatian National Bank, National Bank of Hungary, Bank of Slovenia, Bank of Latvia, Bank of Lithuania, Czech National Bank, National Bank of Slovakia, Haver Analytics, DBRS. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period while reviews are generally resolved within 90 days. DBRS’s trends and ratings are under constant surveillance.

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Lead Analyst: Rohini Malkani
Rating Committee Chair: Roger Lister
Initial Rating Date: December 11, 2015
Most Recent Rating Update: December 11, 2015