(Updates with central banker’s comment in fifth paragraph, markets in 13th.)
Oct. 26 (Bloomberg) -- Polish Prime Minister Donald Tusk must use a speech to lawmakers in about six weeks to show his commitment to budget cuts or face mounting negative pressure on the country’s credit grade, Fitch Ratings said.
Tusk is set to become the first Polish premier since the collapse of communism in 1989 to serve a second term after his Civic Platform party won an election this month. Investors will scrutinize his first parliamentary address because he won’t have the excuse of taking power without a full picture of the economy, Piotr Kowalski, the head of the local unit of Fitch Ratings, said in an interview yesterday in Warsaw.
“The markets will be watching,” he said. “If Tusk doesn’t present a credible plan, it would seriously increase the negative pressure on the rating. If Tusk can convince them that the government has the drive and the ability to get public finances under control, that would do a lot to calm sentiment.”
The government has pledged to narrow the budget deficit to within the European Union limit of 3 percent of gross domestic product in 2012 from last year’s 7.9 percent. Poland’s A- rating may be at risk without additional measures to cut the deficit as economic growth slows amid the euro area’s sovereign-debt crisis, Kowalski said.
The government expects economic growth of 4 percent next year to help it narrow the deficit. The Polish economy could expand up to 3.5 percent next year if the global recovery does not stumble, while a weak German economy could cause Polish growth to slow to below 3 percent, central banker Elzbieta Chojna-Duch told Dziennik in an interview published today.
Fitch lowered its growth forecast for 2012 to 3.3 percent from 3.8 percent, Kowalski said. A wider gap than the government’s target next year may not lead to a ratings downgrade, Kowalski said.
“I don’t think that the single fact of the deficit being, say, just above 3 percent rather than 2.9 percent of GDP would automatically have a negative effect on Poland’s rating,” he said. “It’s the trend that’s important.”
Next year’s budget is based on “unrealistic” assumptions and the fiscal consolidation plan is “not credible,” which may result in a credit-rating downgrade unless the government takes measures to narrow the deficit, central bank policy maker Zyta Gilowska, a former finance minister in the Cabinet of Tusk’s rival Jaroslaw Kaczynski, said in an Oct. 11 interview.
Standard & Poor’s expects “some slight fiscal slippage” without extra budget steps and “negative action” is possible if there’s a deficit overshoot, Leila Butt, a London-based analyst at the ratings company, said in an Oct. 24 interview.
‘Does What’s Necessary’
The Czech Republic, another former Soviet satellite that joined the EU in 2004, is rated two notches higher than Poland, along with Slovakia, which became a member of the euro area in 2009. Hungary, the third largest of the 27-nation bloc’s eastern economies, is three steps lower. There is little chance of Poland’s ‘stable’ outlook being raised “in the short term,” Kowalski said.
“Before we start thinking about a positive outlook, the government needs to make sure it does what’s necessary to avoid more negative pressure on the rating,” he said.
Five-year credit-default swaps, used to speculate on a borrower’s ability to repay debt or hedge against losses, were trading at 248.3 basis points yesterday, compared with Slovakia’s 216.9 and the Czech Republic’s 124.4, figures from data provider CMA show.
The zloty strengthened to 4.3710 against the euro as of 2:33 p.m. in Warsaw from 4.3732 at yesterday’s close. The yield on the 10-year bond maturing in October 2021 fell to 4.731 percent from 5.759 yesterday.
Poland, the EU’s largest eastern country, was the only member of the bloc to avoid a recession in 2009. The economy grew 4.3 percent in the second quarter from a year earlier, compared with 1.5 percent in Hungary and 2.2 percent in the Czech Republic.
Public debt, at 52.8 percent of GDP in 2010, is hovering near a legal ceiling of 55 percent that would trigger mandatory austerity measures. Tusk’s government is “likely” to take steps to ensure debt doesn’t overstep the legal limit, according to Butt at S&P.
EU leaders will convene today to agree on a blueprint to aid the region’s banks, cut Greece’s debt without triggering a default, shield Italy and Spain from further turmoil and shore up the euro.
While Tusk’s Civic Platform group and its Peasants’ Party allies haven’t formally announced whether they will continue working together, the prime minister has said he “doesn’t foresee any difficulties” in renewing the coalition. Together, Civic Platform and the Peasants’ Party would have a majority of five in the 460-seat lower house.
--Editors: Balazs Penz, Andrew Langley
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