OREANDA-NEWS. August 04, 2015. Fitch Ratings has affirmed Poland's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A-' and 'A', respectively. The Outlooks are Stable. The issue ratings on Poland's senior unsecured foreign and local currency bonds have also been affirmed at 'A-' and 'A', respectively. The Country Ceiling has been affirmed at 'AA-' and the Short-term foreign currency IDR at 'F2'.

KEY RATING DRIVERS
Poland's 'A-' rating primarily reflects its strong macroeconomic performance, including the sound economic policy, good GDP growth and stable economic and financial environment. The rating is constrained by low GDP per capita and a high level of external debt relative to peers.

Poland's 'A-' IDR also reflects the following key rating drivers:

Real GDP growth accelerated markedly, to 3.4% in 2014 from 1.7% in 2013, driven by domestic demand in a context of low inflation (+0.0% in 2014), declining unemployment (8.2% at end-2014 from 10% at end-2013) and favourable financing conditions (main policy rate down to 1.5% in March 2015). Fitch expects GDP growth to remain favourable in 2015-2017, at 3.5% on average. Domestic demand will be the main driver. Exports will benefit from the recovery in eurozone GDP growth (1.6% by 2017 from 0.8% in 2014).

In the run-up to the October parliamentary election, the most important in Poland's parliamentary regime, political parties have put forward various proposals on economic policy to appeal to voters. The agency believes that any loosening in the fiscal stance would be limited by Poland's institutional framework including the domestic debt rules, stable expenditure rule and compliance with European Union (EU) debt and deficit criteria. New taxes on specific sectors would likely negatively affect the business environment.

In 2014, the general government deficit declined markedly to 3.2% of GDP from 4.0% in 2013, allowing Poland to exit the Excessive Deficit Procedure after an adjustment for systemic pension reform costs (0.4% of GDP) in line with the Stability and Growth Pact. Fitch expects the deficit will remain below but close to 3% of GDP, at 2.8% in 2015 and 2.5% by 2017. This is consistent with a strengthening cyclical position, increasing tax compliance and expenditure control. The electoral context limits the scope for acceleration in fiscal tightening.

Consistent with its deficit forecast, Fitch expects general government debt will peak in 2016, at 51% of GDP, and start declining thereafter. In the longer term, debt will gradually decrease to 48% of GDP by 2022 The main risks to debt trajectory would be a failure to reduce the primary budget deficit, a sharp depreciation in the exchange rate (FX debt accounts for 32% of general government debt) and lower GDP growth.

Poland's current account deficit (CAD) has decreased thanks to an improvement in its trade balance. In 2014, the CAD was 1.3% of GDP vs. 4.8% on average in 2005-2010. Fitch expects the CAD will remain around 2% by 2017, reflecting increased domestic demand. Net external debt (NXD) will decline to 32% of GDP by 2017 from 34% in 2014 thanks to lower CAD and continued high foreign direct investment and transfers from the EU. NXD will remain high relative to peers.

RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. Nonetheless, the following risk factors could, individually or collectively, trigger positive rating action:
- Continued reduction in external debt ratios.
- Favourable GDP growth that supports income convergence towards EU and 'A' category medians.
- Greater confidence that a track record of low budget deficits and declining government debt ratios is being established.

The following risk factors could individually or collectively, trigger negative rating action:
- Fiscal loosening that endangers the achievement of a medium-term budget deficit and debt reduction targets.
- Weakening of policy credibility or economic performance, resulting either from external or from domestic shocks, that halts income convergence or endangers the stability of public finances.

KEY ASSUMPTIONS
Fitch assumes that fiscal policy will be conducted in line with the Stabilising Expenditure Rule.

Fitch assumes Poland's main economic partners in the eurozone will benefit from a gradual economic recovery with eurozone real GDP growing 1.6% by 2017, up from 0.8% in 2014. In the event of a Greek exit from the eurozone, Fitch assumes this would be unlikely to trigger a systemic crisis like that seen in 2012, or another country's rapid exit. However, it would increase financial market volatility and dent economic confidence.