Fitch Ratings, the international rating agency, has today assigned the Republic of Poland's upcoming 7-year Samurai bond, an expected 'BBB+' rating. The rating is in line with Poland's long-term foreign currency rating, on which the outlook is positive. The proceeds from the bond will help to finance the repayment of debts to the Paris Club of creditors.
Fitch changed the outlook on Poland's long-term foreign currency rating to positive in March to reflect encouraging trends in international trade performance, macroeconomic stability and fiscal consolidation. Although GDP growth dropped unexpectedly to 2.1% in the year to Q105, Fitch expects it to strengthen in subsequent quarters to close to 4% for the year as a whole. Inflation remains on a downward trend, allowing the Monetary Policy Committee to cut interest rates to 5.5%. Despite subdued growth in the EU market, the current account position remained strong in Q105 after a deficit of just 1.5% in 2004.
Public finances are the main constraint on Poland's sovereign rating. The budget deficit widened to 6.8% of GDP in 2004 (general government, European System of Accounts (ESA) basis excluding private pension funds), contributing to an increase in government debt to 48% of GDP from 38% at end-2000. Nevertheless, budget outturns so far this year suggest that the State deficit target of PLN35bn, equivalent to 3.7% of GDP (on national definitions), remains on track. This could equate to a general government deficit of around 5.8% of GDP on an ESA basis excluding private pension funds.
Comprehensive fiscal reforms will be required after the parliamentary elections set for September in order to stabilise the public debt-to-GDP ratio and allow the eventual adoption of the euro. Overall, Fitch has been encouraged by the tone of the pre-election economic policy debate and judges that there is good prospect of progress with sustained fiscal consolidation after the elections. Opinion polls suggest the next government is most likely to be a coalition based around the centre-right Civic Platform, and Law and Justice parties. However, the composition, balance, strength, coherence and detailed economic policies of the next government are still in question.