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Rating Action:

Moody's affirms the A2 ratings of Poland; maintains stable outlook

30 Apr 2021
NOTE: On May 4, 2021, the press release was corrected as follows: In the REGULATORY DISCLOSURES section, the hyperlink in the environmental, social and governance (ESG) risks paragraph was changed to https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068. Revised release follows.

Frankfurt am Main, April 30, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Poland's A2 long-term senior unsecured and issuer ratings. Concurrently, the government's senior unsecured shelf and senior unsecured medium-term note (MTN) programme ratings have been affirmed at (P)A2 and the country's short-term issuer ratings have been affirmed at Prime-1 (P-1). The outlook remains stable.

Today's rating action balances the following key drivers:

(1) Poland's economic resiliency which is one of Poland's key credit strengths; Poland showed a moderate contraction during the COVID-19 pandemic shock compared to peers;

(2) Poland's strong debt affordability metrics and favourable debt structure which balance the impact of the pandemic-driven increase in the government's debt burden on Poland's fiscal strength;

(3) Challenges to Poland's overall still sound institutional framework particularly in the context of adverse developments in Poland's judicial system.

The stable outlook reflects that in Moody's view, risks to Poland's credit profile are balanced. The ratings are supported by a favourable growth and fiscal outlook, as well as Moody's expectation that the actions taken by the EU will eventually contain the challenges to Poland's institutional strength.

Poland's local- and foreign-currency country ceilings remain unchanged at Aa1.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE A2 RATINGS

FIRST DRIVER: ECONOMIC RESILIENCY AS ONE OF POLAND'S KEY CREDIT STRENGTHS

Moody's expects Poland's economic strength to be resilient to the COVID-19 shock, and the scarring effects of the crisis to be small. With a contraction of 2.7% in 2020, the Polish economy was more resilient to the pandemic shock compared to the EU-wide GDP decrease of 6.1%. This was mainly because of the favourable structure of the competitive Polish economy with a relatively low dependence on exports and tourism.

In addition, the pandemic shock was mitigated by a sizeable fiscal support package amounting to 13% of 2020 GDP and an appropriately eased monetary policy by the Narodowy Bank Polski (NBP). The NBP's package included a very significant asset purchase program. Moreover, higher than previously anticipated EU funding will support GDP growth over the period 2021 to 2027. Moody's forecasts GDP to rebound by 3.3% and 4.8% in 2021 and 2022, respectively, and the GDP level of Poland to reach the 2019 pre-pandemic level already again in 2021.

More generally, Poland's economic model is very resilient and shows a growth volatility that is significantly lower than that of peers. This is highlighted by 28 years of uninterrupted economic growth of an average 4.2% between 1992 and 2019, followed by an only moderate economic contraction in 2020. Trend growth is with 3.5% over the period of 2015 to 2024 one of the highest among regional and A-rated peers. Poland's strong growth performance has resulted in a continuous narrowing of the income gap with EU levels since the 1990s. The gap between incomes (measured by per-capita GDP) in Poland and the EU-27 median has narrowed to 15% in 2020 from 48% in 1995.

The catch-up of income levels has been supported by a number of factors including a growth model based on the availability of skilled labor; the EU accession process, including significant inflows of EU funds; and integration into European value chains coupled with sizeable inflows of long-term foreign direct investment (FDI). This environment has helped create relatively high-paid jobs for skilled workers, led to significant knowledge transfers and improved physical infrastructure, which in turn led to improvements in labor productivity.

SECOND DRIVER: STRONG DEBT AFFORDABILITY METRICS AND FAVORABLE DEBT STRUCTURE

Poland's strong debt affordability softens the negative impact of the significant increase of government debt on the country's fiscal strength. The yield of Polish government bonds is at historically low levels caused mainly by investor appetite and the supportive monetary policy stance of the NBP. Moody's forecasts Poland's funding costs to remain favorable and to benefit debt affordability metrics with interest-to-budgetary revenue of on average 2.8% over 2021-24 compared to an average of 4.9% over the past decade.

As most of the increase in debt was issued in local currency in 2020, the structure of Polish debt improved as the share of general government debt denominated in foreign currency decreased to 23.4% from 28.4% in 2019. The Polish authorities target to keep the share of foreign currency denominated debt in State Treasury debt below 25%.

These two factors -- strong debt affordability and improved debt structure -- mitigate the impact of the rise in debt on Poland's fiscal strength. The debt of the general government increased to a peak of 57.5% in 2020 which is 11.9 percentage points above the 2019 level. This was caused by a combination of a revenue shortfall and higher expenditure related to the pandemic shock, fiscal costs of the government's support package and debt increasing stock-flow adjustments related to pre-financing operations and a weaker Zloty against Euro, Yen and Swiss franc.

The pre-pandemic improvements in Poland's fiscal metrics allowed the country to implement a strong countercyclical response to the pandemic shock. That said, the increase in debt-to-GDP in 2020 more than reversed the decline of debt-to-GDP by 10.9 percentage points between 2013 and 2019. With the expected economic rebound and a narrowing fiscal deficit, Moody's expects that the debt-to-GDP ratio will resume to decrease starting in 2021 and to fall to 50.5% by the end of 2024.

THIRD DRIVER: CHALLENGES TO POLAND'S OVERALL STILL SOUND INSTITUTIONAL FRAMEWORK

Overall, the institutional strength of Poland is high, supported by its integration into the EU's institutional framework. In Moody's assessment of the strength of the country's institutions feature also Poland's sound macroeconomic framework based on a credible and independent inflation targeting regime of the NBP and a robust and rule-base fiscal framework. The fiscal rules have helped the government adhere to its public debt-to-GDP target of 60% (national debt definition), which is enshrined in the constitution, an achievement supported by solid growth.

However, Moody's observes with respect to Poland's institutions an elevated policy unpredictability. This assessment is particularly based on concerns with respect to the country's rule of law. More specifically, the government continues to pursue plans with respect to changes in the judicial system that started in 2015 and which risk to undermine the independence of the judiciary by weakening constitutional checks and balances.

The dispute between Poland and the EU regarding the rule of law is ongoing. The instruments that can be used by the EU to combat rule-of-law breaches in general terms include the so-called Article 7 procedure and the infringement procedure. The EU initiated an Article 7 procedure on 20 December 2017 against Poland without any concrete results to date. The Article 7 procedure is the toughest punishment procedure available to the EU and could pave the way for sanctions and potentially the suspension of Poland's EU voting rights. However, sanctions are unlikely because they would require unanimity among member states, which may be hard to achieve given the Government of Hungary (Baa3 positive) has tended to support Poland.

The infringement procedures have proven to be more effective. The European Commission launched several infringement procedures against Poland which reversed some elements of the changes in the judicial system including the removal of provisions requiring early retirement of judges.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's view that risks to its credit profile are balanced, with a favorable growth and fiscal outlook over the next two to three years, and Moody's assessment that the actions taken by the EU will eventually contain the challenges to Poland's institutional strength. Moody's expects economic activity to quickly return to the pre-pandemic levels and to show an average, strong growth of 4.0% over 2021-24 being supported by sizeable EU funding, which will result in a further, solid catch up with EU-wide income levels. After the peak of the debt burden in 2020, Moody's expects Poland to begin rebuilding its pre-pandemic fiscal capacity over the medium-term.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Poland's ESG Credit Impact Score is neutral-to-low (CIS-2), reflecting moderately negative exposure to environmental and social risks, and a strong governance profile that supports the rating and in general the country's capacity to respond to shocks.

Poland's overall E issuer profile score is moderately negative (E-3), reflecting low exposure to environmental risks across all categories except for carbon transition risks being moderately negative related to the reduction of the country's large share of coal in total energy supply over the medium-to-long term.

Moody's assesses Poland's S issuer profile score as moderately negative (S-3). Moody's views unfavorable demographic trends as highly negative. Comparatively fast changing population ageing poses a long-term risk on economic and fiscal metrics that will be partly softened by further increases in the participation rate. Moreover, Moody's views labour and income as being moderately negative related to disparities in unemployment and income levels among regions and between urban and rural areas contributing to societal divisions and political tensions. Moody's sees low exposure to social risks in the categories education, housing, health and safety as well as access to basic services.

Poland's strong institutions and governance profile supports its rating, and this is captured by a positive G issuer profile score (G-1). Poland has an overall strong institutional framework that balances improved institutional quality following Poland's accession to the EU and elevated policy unpredictability. In addition, Moody's observes that the Polish government has implemented reforms that weaken the independence of the judiciary. That said, the country benefits from a high fiscal policy effectiveness being supported by Poland's robust and rule-based fiscal framework as well a credible and independent monetary policy of the NBP.

GDP per capita (PPP basis, US$): 34,624 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.7% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -0.7% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 0.5% (2019 Actual) (also known as External Balance)

External debt/GDP: 59.4% (2019 Actual)

Economic resiliency: a1

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 27 April 2021, a rating committee was called to discuss the ratings of Poland, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT COULD CHANGE THE RATINGS UP

Poland's A2 government bond ratings would come under upward pressure if policymakers successfully addressed the significant policy challenges related to the timing and focus of the withdrawal of support measures. Such a policy path would on the one hand guarantee a sustainable recovery and on the other hand reduce the risk of support measures being in place too long that would delay sectoral reallocation. Rebuilding the pre-pandemic sound public sector balance sheet faster than currently expected would also be credit positive. In addition, the country's A2 ratings would come under upward pressure in case the country's authorities would take measures to reverse the adverse changes made to the institutional framework related to the rule of law.

WHAT COULD CHANGE THE RATINGS DOWN

Downward pressure on the A2 ratings would emerge if the government's fiscal position would deteriorate materially or if economic growth would significantly slow down relative to the pre-pandemic situation. A substantial further deterioration with respect to the rule of law which would have a negative impact on the business location Poland and result in a broader conflict with the EU institutions would also be credit negative.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Heiko Peters
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign/Sub Sovereign
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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