Standard & Poor's Ratings Services revised its outlook on the Republic of Poland to positive from stable. At the same time, the 'BBB+' long-term and 'A-2' short-term foreign currency, and the 'A-' long-term and 'A-2' short-term local currency ratings on Poland were affirmed.
The outlook revision reflects the improvement in Poland's medium-term fiscal outlook compared with our earlier expectations. It also reflects the economy's good economic prospects and comfortable external position. Standard & Poor's baseline fiscal scenario reflects expectations that the next government (after elections likely to take place in mid-2005) will continue the fiscal reform effort initiated by the current administration, resulting in the gradual decline of the general government deficit to 5.9% in 2005 and 4.7% by 2007, from about 7.0% of GDP in 2004.
The general government debt burden is forecast to increase moderately to 52% in 2007 from an estimated 47% in 2004, before it embarks on a declining trend from 2008 onwards. These estimates contrast with the
government deficit figures (on a cash basis) of 5.4% in 2004 and targets of 4.5% in 2005 and 2.8% in 2007. The wider deficits forecast by Standard & Poor's largely reflect transfers to private pension funds (which add
some 1.5% of GDP annually) and the expectation of lower GDP growth and larger deficits among extra-budgetary funds than the government's forecast.
Continued good revenue performance, expenditure control, and the savings from the deindexation of pensions mean that there are few risks to the 2005 fiscal outlook. In 2005-2007, the partial implementation of savings measures within the government medium-term fiscal strategy--known as the Hausner program--and xpenditure control are expected to result in annual net savings of around 0.6% of GDP on average.
Beyond 2005, as favorable cyclical developments wind down somewhat, a deepening of fiscal reforms and a political environment more supportive of fiscal consolidation will be required to meet Poland's ambitious medium-term fiscal targets and adopt the euro before 2010. The next government is likely to be a coalition led by the reformist Civic Platform, which therefore improves the prospects of faster fiscal consolidation, as the
party advocates a more severe fiscal adjustment. Nevertheless, uncertainty on coalition partners, on their agreement on key economic and fiscal reforms, and on future parliamentary support for the government's reform plans limits the predictability of the pace of the deficit and debt reductions in the medium term.
On the external side, gross external borrowing requirements (the current account balance plus scheduled principal repayments on external debt plus the stock of short-term debt) are projected at an annual average
of about 110% of foreign exchange reserves in 2005-2008, in line with the 'A' and 'BBB' medians of 105% and 102% respectively. Medium-term external borrowing requirements could be lower if plans to prepay Poland's outstanding debt to the Paris Club ($12.3 billion) in 2005, currently under negotiation, materialize. This would significantly reduce principal repayments in 2005-2008, which now stand at an annual average $3.5 billion for the period, of which almost 90% are Paris Club debt redemptions.
Outlook
The positive outlook reflects expectations of a gradual improvement in fiscal trends from 2005 onward, Poland's good economic prospects--with annual GDP growth forecast at 4.0%-4.5% of GDP in 2005-2008--and a comfortable external position. In the medium term, Poland's ratings could be upgraded if the next government engineers a fiscal reform program which results in a sustainable reduction of the deficit and debt levels beyond Standard & Poor's current projections, and which improves the prospects for earlier EMU accession. Conversely, absent fiscal reforms, the general government deficit could return to about 6%-7% of GDP in 2006-08 prompting downward pressure on the ratings on Poland.
Ratings List
Foreign currency sovereign credit ratings BBB+/Positive/A-2 BBB+/Stable/A-2
Local currency sovereign credit ratings A-/Positive/A-2 A-/Stable/A-2
Commercial paper A-2 A-2
NB: This list does not include all ratings affected.