Poland awaits Moody's report amid concern over new policies

AP News
Posted: May 13, 2016 6:57 AM
Poland awaits Moody's report amid concern over new policies

WARSAW, Poland (AP) — Poland is bracing for a possible credit downgrade by ratings agency Moody's on Friday amid international concerns over the new government's move to erode the independence of key institutions and increase spending.

Poland has been one of Europe's most dynamic economies for years, with growth expected at around 3.5 percent this year despite a slight contraction in the first quarter. But investor confidence has been shaken by the government's new policies.

Standard & Poor's already downgraded Poland by one notch earlier this year, something the government slammed as unfair considering the nation's relatively high growth, and investors are bracing for either a downgrade by Moody's or a change in the country's outlook.

From 2007 to 2015 the country was run by a pro-market party, Civic Platform, which oversaw eight years of strong economic expansion. It lost elections last year amid frustration that too many Poles were left out of that success story, with many still struggling on very low wages.

The new ruling party, Law and Justice, won power promising to help the poor and families and has already begun paying child benefits. It has promised other measures that aim to help struggling Poles, but which investors fear will unbalance state finances. Among those measures are plans to lower the retirement age and to convert Swiss franc loans into zlotys to the benefit of the mortgage holders.

Marcin Mrowiec, economist at Bank Pekao SA, said investors are mostly nervous about the Swiss franc conversion plan since it has the potential to destabilize some banks, perhaps even the whole banking system, if the costs to the banks are great.

Piotr Buras, head of the Warsaw office of the European Council on Foreign Relations, argues, however, that investors are above all spooked by legal instability in the country due to an ongoing crisis concerning the Constitutional Tribunal.

"The institutional revolution we are experiencing these days has tremendous consequences for how the Polish economy and its prospects are seen in the world," Buras said.

The Central Statistical Office said the economy contracted 0.1 percent quarter-on-quarter and that yearly growth was at 3 percent.

Mrowiec said that several factors contributed to the slowdown: uncertainty over the government's fiscal plans; changes in management at state-run enterprises, which resulted in a temporary slowdown in investments; and a gap between two spending periods by the European Union, whose cash infusions have been a key source of Poland's growth over the past 12 years.

"The first quarter looks a bit less rosy but it was to be expected," Mrowiec said. "We expect the following quarters to be stronger."