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Rating Action:

Moody's changes outlook on Poland's A2 issuer rating to stable from negative; affirms ratings

12 May 2017

London, 12 May 2017 -- Moody's Investors Service, ("Moody's") has today changed the outlook on Poland's A2 issuer rating to stable from negative. Moody's also affirmed Poland's A2 long-term senior unsecured and issuer ratings, the (P)A2 senior unsecured MTN programme rating and the short-term issuer rating of P-1.

Moody's decision to change Poland's outlook is based on the following factors:

(1) Reduced risks of loose fiscal policy, with the headline fiscal balance adhering to the 3% of GDP limit and public debt stabilizing at or near the current level of 55% of GDP.

(2) Uncertainties stemming from government policies will remain contained, which in turn will ease the downside risks to the business climate and investment flows.

Poland's long-term and short-term foreign-currency bond and deposit ceilings remain at Aa3/P-1 and A2/P-1, respectively. At the same time, the long-term local-currency bond and deposit country ceilings remain at Aa3.

RATINGS RATIONALE

The affirmation of Poland's A2 rating is based on the country's economic resilience as reflected in a large, diversified economy that has shown robust real GDP growth irrespective of external headwinds. It is also supported by the country's institutional strength and limited vulnerability to domestic and external shocks.

RATIONALE FOR OUTLOOK CHANGE TO STABLE FROM NEGATIVE

FIRST DRIVER -- FISCAL RISKS RELATED TO LOOSER FISCAL POLICY HAVE EASED

The primary driver behind Moody's decision to change the outlook on Poland's government issuer rating to stable from negative is Moody's expectation that the downside risks to the fiscal stance that led to the negative outlook one year ago are abating and that the relatively favourable debt affordability metrics will be maintained.

In 2016, the fiscal deficit declined to 2.4% of GDP, utilizing the Eurostat classification from 2.6% in 2015, below Moody's estimate of 2.8% of GDP and below the Maastricht threshold of 3.0%. Hence one of the factors behind Moody's May 2016 decision to assign a negative outlook did not materialize as the fiscal balance complied to the Maastricht threshold in 2016 for a second consecutive year. Moody's notes that while the one-off proceeds from the sale of the LTE helped boost revenues, in the Eurostat definition the proceeds are classified as rents and hence only a portion (1/15) is recorded as 2016 revenues. In Q1 2017, the budget deficit was also smaller than the government planned/projected on account of higher than expected tax revenues, with value-added tax (VAT) receipts rising by about 40% relative to the first quarter of 2016, corporate income tax receipts by 15%, and personal income tax revenues by 5%.

Looking forward, Moody's expects the government to continue to adhere to the 3% of GDP limit on the headline fiscal deficit. While some of the recently-adopted measures, such as the reduced retirement age, are putting upward pressure on government spending, the government postponed or cancelled others, including lowering the VAT rate and providing tax exemptions to small and medium-sized enterprises.

Economic growth in the medium term will likely remain supportive of the government's fiscal balance, on the back of domestic demand, improving export prospects and higher utilization of European Union Funds inflows, which are estimated to around €6.9 billion (1.5% of GDP) and €10.2 billion (2.2% of GDP) in 2017 and 2018, respectively. Over a longer time horizon however, growth prospects -- and government budgets -- will be challenged by an ageing population and rising dependency ratios. The country's capacity to address these challenges and maintain growth trends supportive of public finances will hinge on maintaining solid labor productivity gains and, in particular, on moving from an efficiency-driven to innovation-driven economy and raising technological content in output and exports.

Moody's currently projects that Poland's public debt ratio will stabilize at around 55% during the 2017/21 period, under a baseline scenario that assumes average real GDP growth of 3.2% between 2017 and 2021. Its baseline scenario foresees fiscal deficits of around 2.8% between 2017 and 2021, with primary deficits reaching around 1.0% of GDP on average. Nevertheless, the risks of social spending pressures and populist measures remain, even though they are balanced by increased political competition in the run up to the 2019 general elections. Poland's track reform on implementing structural reforms over the past few decades bodes well for investment-supporting reforms and growth over the medium term. The Morawiecki plan, which presents an economic road map until 2020, would also support medium-term growth and thus containment of debt-to-GDP ratio if implemented within sound fiscal limits.

SECOND DRIVER -- UNCERTAINTY REGARDING GOVERNMENT POLICIES IS BEING CONTAINED AND ITS RISKS TO INVESTMENT INFLOWS ARE ABATING

The second driver of Moody's decision to stabilize the outlook on Poland's government rating is its expectation that uncertainty stemming from unorthodox government policies will remain contained, with risks to the business climate and investment flows abating. One of the factors behind Moody's decision to assign a negative outlook in May 2016 was the expected impairments to the investment climate from the government's shift towards more unorthodox and unpredictable policies. Since then however, the government has taken actions to reverse or dilute some of the measures announced shortly after coming into power. For instance, the recent decision of the ruling party to cancel its plan to convert Swiss-franc-denominated mortgages into local currency has removed a significant risk to banking sector stability as well as to overall investor sentiment.

Despite some increase in policy uncertainty post-2015 elections, the evidence does not suggest that the investment climate has materially weakened as foreign direct investment (FDI) inflows remained robust and portfolio flows relatively stable. CDS spreads over 5-year US bonds also marginally decreased between May 2016 and 2017 by about 20 basis points. At 2.9% and 3.0% of GDP in 2015 and 2016, respectively, FDIs have stayed close to its long-term trend (10 -- year average of 3.0% of GDP) and remain an important source of growth. Poland's attractiveness to investors rests on fundamentals such as the size of its market, good transport infrastructure, its strategic location, a relatively good business environment (Poland ranked 24th out of 190 countries in a 2017 Doing Business survey) and an affordable, well-educated labour force. The country has been successfully tapping its strength in providing advanced business services, including IT as well as back and middle office operations, as a key FDI destination sector.

RATIONALE FOR AFFIRMING THE RATINGS

Based on Poland's economic size, competitiveness and growth prospects, Moody's assesses the country's economic strength above the median for A-rated peers. Poland in particular has exhibited high and stable economic growth and has solid growth prospects, driven by its ability to attract FDI, seize opportunities from Brexit and relocate its workforce from low productivity activities such as agriculture to more productive ones in high-value adding services or industry. Against the background of continued positive labour market dynamics and stronger external demand, we forecast 2017 and 2018 real GDP growth of 3.2% and 3.1%, respectively.

Besides substantial economic strength, Poland possesses a coherent and well-functioning monetary policy framework and a stable financial sector. Control of corruption and adherence to the rule of law also contribute to support institutional strength. Government liquidity risk is very low while the flexible exchange rate regime and access to the IMF's Flexible Credit Line (FCL) help absorb potential external shocks.

However, these strengths are partly offset by the country's reduced government effectiveness due to still somewhat unpredictable policies, as well as by external vulnerabilities stemming from relatively high external debt, despite solid reserve import coverage and low current account deficits. Deep and persistent societal divides that drove the 2015 election results continue to elevate the domestic political risk above the median of A-rated peers.

WHAT COULD CHANGE THE RATING UP/DOWN

Measures that would bring about improvements in the long-term sustainability of the social security system as well as in the institutional framework would exert upward pressure on the rating. Structural reforms that would further increase medium term growth prospects and labour productivity would also be credit positive.

A permanent deterioration in the government's fiscal position and/or a material impairment in the investment climate, potentially including substantial capital outflows, would generate downward pressure on the rating. Similarly, the lack of progress with structural reforms that would stall innovation and/or deter FDI and hence hamper growth would be credit negative.

GDP per capita (PPP basis, US$): 27,764 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.7% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.8% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -2.4% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -0.3% (2016 Actual) (also known as External Balance)

External debt/GDP: 71.6% (2016 Actual)

Level of economic development: High level of economic resilience

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

On 09 May 2017, a rating committee was called to discuss the rating of the Poland, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have increased. The issuer's institutional strength/ framework, 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.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. 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 ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Zuzana Brixiova
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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