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Poland avoids second-ever rating downgrade as Moody’s cut outlook


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Poland avoided a second credit-rating reduction in its history as Moody’s Investors Service left its investment grade unchanged while cutting its outlook on the sovereign amid growing investor concern over government policies.
Moody’s changed the outlook to negative after keeping it stable for a decade, meaning there’s now at least a one-in-three chance of a cut over the next 24 months, according to a statement on Saturday. Poland’s long-term foreign debt grade will remain at A2, the fifth-lowest investment rating and two steps higher than S&P Global Ratings, which cut its view by one level in January.
Moody’s cited as drivers for the decision the fiscal risks related to a “substantial” increase in current expenditures, as well as “impairments to the investment climate from a shift towards more unpredictable policies and legislations.”
A backlash has been building over efforts by the ruling Law & Justice party to assert influence over state institutions after winning October’s general election, which prompted Poland’s first-ever credit downgrade four months ago. The new government’s revamp of the Constitutional Tribunal made it more difficult for the court to strike down laws, sparking an unprecedented probe by the European Commission into a member state’s democracy.

Asset Selloff
Investors have sold Polish assets this year as authorities imposed new taxes on banks, rolled out a program of child benefits that may swell Poland’s budget deficit beyond European Union limits and debated forcing lenders to convert foreign-currency mortgages.
The rating company’s decision to keep Poland’s credit score unchanged could help markets recover ground after some investors priced in a downgrade, according to Jaroslaw Janecki, an economist at Societe Generale SA in Warsaw and Krzysztof Izdebski, a money manager at Union Investment TFI SA in Warsaw.
All but one of the 21 analysts surveyed by Bloomberg had forecast that Moody’s would take negative action on Friday. More than half saw a downgrade of the sovereign from A2, where it’s been since 2002. Nine respondents said only the outlook would be cut to negative.

“An outlook change could be positive for the market, due to the fact that some investors expect the more negative scenario,” Janecki said by phone on Thursday.
Poland’s status as a refuge for traders looking to wait out turmoil on less developed markets has been eroding. The zloty was the worst performer among the currencies of emerging economies in April, losing 3 percent versus the euro and 2.4 against the dollar. The Polish currency advanced 0.4 percent to 4.3955 per euro on Friday, curbing its month-to-date decline to 0.6 percent, according to data compiled by Bloomberg.
Steps by the Law & Justice-led government to consolidate power have been behind the bearishness. Moody’s warned last month that heightening political risks in the country were “credit negative.”
While S&P cited concern over the independence of key institutions, including the central bank and public media, the focus is shifting to the economy and the fiscal outlook in the east European country of 38 million people.

Outlook Dims
The European Commission forecast Poland’s $545 billion economy will expand 3.7 percent in 2016 and 3.6 percent in 2017, not fast enough to prevent the budget deficit from swelling to more than 3 percent of gross domestic product next year as additional spending measures kick in.
GDP growth last quarter decelerated to the slowest since 2013, advancing 3 percent from a year earlier after jumping 4.3 percent in the final three months of 2015.
“The lower outlook means the risk of a downgrade remains intact,” Michal Dybula, the chief economist at BNP Paribas SA in Warsaw, said on Friday before Moody’s announcement. This can change only if “the government resolves its conflict with the Constitutional Tribunal, refrains from policies that could damage the country’s fiscal prospects and swiftly adopts a more realistic approach to the conversion of mortgages.”

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