WARSAW – Poland avoided a ratings downgrade from Moody’s on Saturday, but the credit rating agency shifted its outlook from stable to negative citing unpredictable economic policies and a political standoff.
Poland is one of Europe’s fastest growing economies, but investor confidence has been shaken both by a host of expensive promises made by the right-wing Law and Justice party government, which won October’s election, and by a crisis over the country’s top constitutional court.
The country had feared a downgrade, which would have been the second after Standard & Poor’s in January.
Although Moody’s predicted the Polish economy would grow by 3.5 per cent this year and in 2017, the agency changed its outlook because of plans to increase spending and lower the retirement age.
It also warned about “unpredictable policies” like a promise to allow borrowers with mortgages denominated in Swiss francs to convert them to złotys, as well as a standoff over the Constitutional Tribunal.
“Though the implications of the constitutional changes for the independence of the Polish judiciary and therefore for the sovereign’s institutional strength remain unclear at this juncture, the crisis has the potential to impair investors’ perception of the rule of law and thereby their propensity to invest,” Moody’s said.
The tribunal ruled earlier this year that a law changing its procedures was unconstitutional, but the government refuses to recognize the verdict. President Andrzej Duda has also refused to swear in three justices elected by the previous parliament.
Moody’s decision follows a January ratings move by S&P, which downgraded Poland to BBB+ from A-, and moved its outlook to negative, saying, “Poland’s system of institutional checks and balances has been eroded significantly,” under the new government.
The government denounced the cut as unfair, saying the decision was based on politics and not on the country’s ability to repay its debts.
The government’s conflict with the Constitutional Tribunal, growing public protests in the country, strained ties with the EU and its allies, and a raft of expensive spending promises made during last year’s election campaign have tarnished Poland’s reputation among investors.
The Warsaw Stock Exchange, the largest in the region, saw its benchmark WIG20 index suffer the worst losses of 93 indexes tracked by Bloomberg in the past quarter. Bloomberg calculated that the WSE has shed $50 billion in market value since Duda was elected a year ago.
That comes as the Polish economy posted disappointing first quarter results, with GDP contracting by 0.1 percent in the first three months of the year, Poland’s worst performance since 2012.
Peter Attard Montalto, emerging markets economist with Nomura, called the result a “shock of a number.”
The economy’s annual growth rate came in at 3 percent, below analysts’ expectations.
“Everything indicates that the slowdown in GDP growth is the result of weakening investments, a reduction in inventories and a lower dynamic of exports,” said Małgorzata Starczewska-Krzysztoszek, chief economist for Lewiatan, the Polish employers’ confederation.
Growth is expected to pick up in the second quarter thanks to a new government program paying bonuses to families with children, which should boost consumption.