Fitch: Weaker Growth, Policy Pledges Raise Polish Fiscal Risks
OREANDA-NEWS. Poland's reliance on rapid GDP growth to meet fiscal targets, and potential political pressure on the government to deliver on electoral promises, mean that any economic slowdown, such as that seen in first quarter of 2016, increases fiscal risks, Fitch Ratings says.
The Polish government's 2016 Convergence Programme submitted to the European Commission at end-April, which covers fiscal policy for the period 2016-2019, forecasts the fiscal deficit will rise to 2.9% of GDP in 2017 from 2.6% in 2016 and 2015. One-off revenues from LTE spectrum auctions (worth 0.5% of GDP in 2016) will not be available from 2017. The Programme relies on GDP growth of 3.8% in 2016, 3.9% in 2017 and 4.0% in 2018, along with improving tax compliance and VAT reform, to support revenues as expenditure rises, and keep the deficit below the Stability and Growth Pact's (SGP) 3% of GDP limit.
We expect slightly higher deficits, at 2.8% in 2016 and 3.0% in 2017, based on our lower GDP and tax growth assumptions. GDP growth will remain strong, but we have revised down our forecast to 3.2% in 2016 from 3.5% following a weak Q116 (Eurostat said on Friday that the Polish economy contracted 0.1% q/q). We forecast GDP growth at 3.5% in 2017 and 2018. Potential policy adjustments to deliver on electoral promises constitute another risk.
The Convergence Programme's fiscal baseline does not include the impact of government pledges to lower the retirement age and increase the income tax threshold, which have not yet been implemented. However, it estimates their potential costs in 2017 at respectively 0.4% and 0.2% of GDP. Compliance with the government's own deficit targets would therefore require offsetting measures, one of which could be the cancellation of the already legislated cut in VAT which is projected to cost 0.4% of GDP in 2017.
Compliance with the SGP's deficit criterion is an important benchmark for Fitch in assessing the Polish authorities' fiscal stance. Indications that its relevance as a fiscal anchor was weakening would be a credit negative signal. We believe there are strong incentives for the government to comply and avoid the risk of a new Excessive Deficit Procedure (EDP). Poland exited the EDP in 2015 and reopening it would damage policy credibility and potentially result in financial sanctions via reduced disbursement of EU funds, which have been a key driver of Poland's economic growth since EU accession in 2004.
Meanwhile, this month's large demonstration in Warsaw against the ruling Law and Justice (PiS) party is a reminder that the more confrontational governing style since the 2015 election, notably over the functioning of the Constitutional Tribunal, has increased the polarisation of Polish society and could fuel political instability. Along with a deterioration in relations with some key economic partners in the European Union, this raises risks to the investment and macro outlooks.
When we affirmed Poland's 'A-'/Stable rating in January, we identified relaxation of the fiscal stance that worsens the government debt trajectory, or a weakening of policy credibility or economic performance, as triggers for a possible negative rating action.