(Updates with Moody’s comment from second paragraph.)
Oct. 11 (Bloomberg) -- Poland’s rating outlook may come under pressure unless the government presents “contingency plans” to reduce the budget deficit as economic growth slows amid the European debt crisis, Moody’s Investors Service said.
The government’s plan to cut the deficit to 2.9 percent of gross domestic product next year “might be out of reach,” Jaime Reusche, an assistant vice president for sovereign risk at Moody’s in New York, wrote in an e-mailed response to questions from Bloomberg News yesterday. Moody’s rates Poland A2, the sixth-highest investment grade.
“Underestimating the risks of what is to come is dangerous, but policy-makers in Poland are conscious about these challenges and the uncertainty that surrounds the operating environment,” Reusche wrote. “Nevertheless, we have not yet seen contingency plans by the government, and this could certainly impact the stable outlook.”
The government of Prime Minister Donald Tusk, which won general election over the weekend, promised to cut the budget gap to below 3 percent of GDP next year after it widened to a record 7.9 percent in 2010. Under his stewardship, Poland was the only European Union economy to keep growing through the global credit crisis helped by tax cuts and construction projects funded in part by EU aid.
“The challenge of what is to come highlights risks that could lead to a negative outlook,” Reusche wrote. “Poland has remained resilient throughout the first episode of the crisis, which showed evidence of its credit strengths, the second episode will continue to test that resilience given the successive shocks to the government’s balance sheet and the economy.”
The risks to Moody’s projection that Poland economy will expand by around 3 percent next year “are clearly on the downside” as growth may be dragged down by the sovereign debt crisis in the euro area, according to Reusche. Tusk has based its deficit plan on the economy growing 4 percent in 2012.
The goal of reducing the shortfall to 2.9 percent of GDP is “practically impossible” and the euro region’s economy slowing to “near-zero” growth would limit Polish expansion to between 1.5 percent and 2.5 percent, Dariusz Filar, an economic adviser to Prime Minister Donald Tusk, said in an interview yesterday. The gap may be near this year’s 5.6 percent goal, he said. Poland sends 55 percent of its exports to the euro region, according to data from the Statistics Office.
Poland must reduce its budget deficit or face a possible rating cut in the “medium term,” David Riley, head of sovereign ratings at Fitch Ratings, said in an interview yesterday. The election outcome has no immediate effect on Poland’s sovereign rating of A- with a stable outlook, Standard & Poors said yesterday in an e-mail, adding it will focus on “whether the new government will introduce additional measures aimed at consolidating public finances.”
“The message seems to be that Poland doesn’t want change jockeys in the middle of the race, alluding to the fact that the second episode of the crisis looms near,” Reusche wrote. “The fact that the current government will remain in power eliminates transition costs in the form of stop-and-go policies.”
--With assistance from Jason Webb in London and Dorota Bartyzel in Warsaw. Editors: Wojciech Moskwa, Chris Peterson
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