(Updates with currency, bonds in seventh paragraph.)
Oct. 24 (Bloomberg) -- Poland’s government, re-elected this month, will probably take steps to prevent the country’s debt from breaching a legal limit and the country may be upgraded if it takes growth-spurring measures, Standard & Poor’s said.
Prime Minister Donald Tusk, the first incumbent government leader to win an election since the collapse of communism 22 years ago, needs to keep public debt, at 52.8 percent of gross domestic product last year according to national accounting standards, from breaching a 55 percent ceiling that would trigger mandatory austerity measures.
“The government will likely take measures to prevent debt from breaching” the 55 percent limit, S&P analyst Leila Butt said in a telephone interview today. “If the government took steps to improve competitiveness, which would raise production and help speed up growth, while halting and eventually reducing debt levels, we could take positive action on the rating.”
The government is struggling to bring the deficit under control after it reached 7.9 percent of GDP last year. Finance Minister Jacek Rostowski has reiterated Poland will succeed in narrowing the shortfall to within the European Union limit of 3 percent of gross domestic product in 2012.
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.
“We expect some slight fiscal slippage unless the government takes measures beyond what it has currently outlined,” Butt said. “Negative action is possible if the government has more slippage on the fiscal position than we’re expecting.”
The zloty strengthened to 4.3754 against the euro as of 3:16 p.m. in Warsaw from 4.3923 on Oct. 21 The yield on Poland’s 10-year bond maturing in October 2021 rose to 5.787 percent from 5.766 percent on Oct. 21.
Meeting the target will require Tusk to amend measures already announced, including a public-sector wage freeze and plans to cut pension privileges for professions including the police and army, Butt said.
“The government is taking positive steps by saying it will tackle the uniformed pensions and raise the retirement age,” Butt said. “But high levels of mandatory expenditure make it more difficult to put public finances on a sustainable track.”
The zloty has gained 1 percent against the euro this month. Polish government debt maturing in more than 10 years returned 6.6 percent in dollar terms in the past month, the best performance among 174 indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
S&P has an A- rating on Polish debt, three notches below neighboring Czech Republic and three steps above Hungary. Moody’s Investors Service said after the Oct. 9 election that Poland’s rating outlook may come under pressure unless the government presents “contingency plans” to cut the budget gap. Moody’s rates Poland A2, the sixth-highest investment grade.
European leaders yesterday outlined plans to aid banks, cut Greece’s debt without triggering a default and shield Italy and Spain from further turmoil, while ruling out tapping the European Central Bank’s balance sheet to boost the region’s rescue fund yesterday in their 13th crisis-management summit in 21 months. The complete blueprint won’t come together until the next summit on Oct. 26.
Tackling Poland’s public finances will be the greatest challenge for Tusk as he prepares to take office for a second term, according to Jan Amrit Poser, chief economist at Bank Sarasin.
Poland, the EU’s largest eastern country, was the only member of the 27-nation bloc to avoid a recession at the height of the global crisis in 2009. The economy grew an annual 4.3 percent in the second quarter, compared with 1.5 percent in Hungary and 2.2 percent in the Czech Republic.
Slowing economic growth and the euro region’s debt crisis may derail the plan unless the government takes “more drastic” measures, Fitch Ratings said on Oct. 10.
GDP has the potential to rise in the coming years with Poland’s internal market of 38 million consumers buffering the economy from dwindling external demand as the euro area battles its sovereign-debt crisis, S&P’s Butt said, estimating the expansion rate between 3 percent and 3.5 percent next year, depending on the performance of the euro region.
“The country has a solid growth potential in the short- to medium-term,” she said. “It’s less export dependent than other countries in the region and can rely on its domestic market to drive growth.”
--With assistance from Dorota Bartyzel in Warsaw. Editors: Balazs Penz, Douglas Lytle
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