Dagong Maintains Sovereign Credit Rating for Poland at A and A- with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
September 28, 2018
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided today to maintain both the local and foreign currency sovereign credit rating for the Republic of Poland (“Poland”) at A and A-, each with a stable outlook. The debt repayment environment in Poland is basically stable. Although the economic growth rate has slowed down slightly, the implementation of structural reforms is conducive to improving finances and weakening the debt burden, and the government's solvency remains stable. Due to the long-term deficit of the current account and the high external debt burden, the government's foreign currency is slightly lower than the local currency.
The main reasons for maintaining the sovereign credit rating of Poland are highlighted as follows:
1. The debt repayment environment is basically stable. The government’s strong populist tendencies, intervention in democracy and judicial independence, and anti-refugee resettlement have made Poland’s position in the EU increasingly marginalized. In addition, tension between Poland and Russia has continued, and trade protectionism has prevailed, thus intensifying Poland’s geopolitical risks. However, the strengthening of government power after the expansion of the law and the justice party is conducive to policy continuity. The implementation of welfare and benefit-minded policies has alleviated the contradiction with the domestic “pro-European faction”. The law and justice party is firmly rooted and is expected to reelect in the 2019 parliament election, thus maintaining the political stability in Poland. In the short term, the continued loose monetary policy provides sufficient credit resources for the domestic economy, the external vulnerability of banks and liquidity risks are further improved, and the banking system remains stable.
2. The short-term economic growth rate slows down due to weak external demand, and the medium and long-term economic development faces structural constraints. In 2017, strong domestic demand boosted Poland's growth rate by 1.7 percentage points year-on-year to 4.6%. In the short term, the decline of the “family 500+” plan, the rise of oil prices, and rising inflation levels will reduce the purchasing power of residents. In addition, the government’s current expenditure and the pull of consumption on the economy will decrease. The increase in domestic infrastructure investment, as well as the accelerated absorption of the EU funds and the improvement of the business environment, has led to an increase in investment momentum. However, the slowdown in external demand and the continued rise in import demand have severely weakened net export. Therefore, the country‘s growth rate in 2018 and 2019 is estimated to decrease by 0.4 and 0.8 percentage points from 2017 to 4.2% and 3.8% respectively. In the medium and long term, negative factors such as intensification of labor mismatch, unbalanced development of the eastern and western regions, and lag in infrastructure have dragged down economic growth, Poland’s average economic growth rate over the medium to long term is estimated to hover around 3.6%.
3. Although the fiscal deficit has expanded, strong financing capacity and external support have kept the sources of debt repayment stable. In 2017, due to the significant increase in economic growth and the strengthening of tax collection and management, the fiscal deficit rate of all levels of government in Poland has narrowed by 0.6 percentage points to 1.7%. In the short term, the tax incentives and the increase in social welfare and capital expenditures have continued to expand the fiscal deficit. As a result, Poland’s fiscal deficit is projected to expand to 1.9% and 2.0% in 2018 and 2019. However, strong financing capability and external support can guarantee the stability of government’s sources of debt repayment.
4. The government solvency in local and foreign currency will remain stable. The continued expansion of the fiscal deficit has led to a slight increase in the government debt burden to 51.0% and 51.1% respectively in 2018 and 2019, but a reasonable debt maturity structure and low financing costs could stabilize government solvency in local currency. As of the first quarter of 2018, the total external debt burden rate of Poland fell by 2.0 percentage points to 64.7%, the coverage of foreign exchange reserves to total external debt was only 29.9%, indicating low degree of external debt repayment. As a result, Poland’s government solvency in foreign currency was slightly lower than that in local currency. In the short term, Poland's capital and financial project surplus can make up for the current account deficit, and the smooth external financing channels can provide guarantee for the government's foreign currency solvency.
In the short term, despite the pressure on the political situation in Poland, the fiscal deficit has expanded slightly, but the steady economic growth, loose monetary environment, stable Polish zloty
, strong debt financing capacity and strong support from EU funds have kept the government's solvency stable. In summary, Dagong has decided to maintain a stable outlook for the local and foreign currency sovereign credit rating of Poland for the next one to two years.