S&P Unexpectedly Lowers Poland Rating, Fitch Affirms

(RTTNews) - Rating agency Standard & Poor's on Friday downgraded Poland's credit rating in a surprise move, saying that the new government has weakened the key institutions. Meanwhile, S&P's peer Fitch Ratings affirmed the country's credit rating.

The rating downgrade was a first for Poland and was unexpected. The Finance Ministry described the S&P move as "incomprehensible" from economic and financial analysis point of view, saying the downgrade was not preceded by changes of rating outlook, which was positive prior to that decision.

The Polish zloty fell to a four-year low against the euro immediately on the news of the downgrade. The rating agency expects the Polish government's overall policy inclination will be more interventionist, which it fears will ultimately impact the foreign exchange market.

S&P lowered the long­term foreign currency sovereign credit rating on Poland to 'BBB+' from 'A­', and the long­ and short­term term local currency sovereign credit ratings to 'A­/A­2' from 'A/A­1'.

"The downgrade reflects our view that Poland's system of institutional checks and balances has been eroded significantly as the independence and effectiveness of key institutions, such as the constitutional court and public broadcasting, is being weakened by various legislative measures initiated since the October 2015 election," S&P said.

"In our view, these measures erode the strength of Poland's institutions and go beyond what we had anticipated regarding policy changes from the general election," the agency added.

The rating outlook was also lowered to 'negative' from 'positive', suggesting at least a one­-in­-three likelihood that the ratings could be lowered within the next 24 months, if monetary policy credibility is undermined or if public finances deteriorate beyond S&P's current expectations.

Further, S&P no longer expect Poland's fiscal metrics to improve, but foresee some reversals in Poland's sound macroeconomic management of the past years, for instance by targeting certain sectors with new taxes.

The agency also raised the fiscal deficit forecast for 2016 to 3.2 percent of GDP, saying that various spending­side measures, either planned or announced, are not fully offset by revenue­side measures or expenditure cuts.

Since coming to power after winning the October election, the Law and Justice Party has adopted measures to increase the government's influence in state institutions.

On January 13, the European Commission requested information on the situation concerning the Constitutional Tribunal and on the changes in the law on the Public Service Broadcasters, citing concerns regarding the respect of the rule of law.

Meanwhile, Fitch affirmed Poland's Long-term foreign and local currency Issuer Default Ratings at 'A-' and 'A', respectively, with stable outlooks.

The country "A-" rating balances its strong macro performance, resilient banking system and governance indicators in line with the 'A' rating category against high external debt, higher-than-peers' government debt and relatively low GDP per capita despite income convergence towards the European Union average recently, Fitch said.

The agency noted that the stable outlook reflected the assessment that upside and downside risks to the rating are currently balanced. That said, Fitch warned that any relaxation of the fiscal stance that worsens the government debt trajectory and weakening of policy credibility or economic performance, could trigger a negative rating action.