The FINANCIAL — London-10 October 2011: Fitch Ratings believes that the incoming Polish government needs to reassess the country's fiscal consolidation plan in light of slower growth if Poland wants to remain on target to meet the convergence criteria in the Maastricht treaty.
The sovereign's aim of reducing the budget deficit to below 3% of GDP next year is predicated on an optimistic 4% growth rate, with Fitch forecasting a 3.3% growth rate for Poland next year. If it is serious about reaching its 3% of GDP target the incoming government will have to implement more drastic fiscal measures. This will likely require further cuts in expenditure.
The final election results are not yet known, but the most likely outcome is a continuation of the existing coalition between the Civic Platform (PO) and the Polish People's Party (PSL). In this scenario, Fitch expects Jacek Rostowski to continue as finance minister. An alternative outcome is a coalition between the PO and Palikot's Movement (RP). The leader of the RP, Janusz Palikot is a former member of the PO. His focus is social liberalisation and he has not clearly laid out his economic policies. However, one of the reasons he left the PO was frustration over the slow pace of economic and labour market reform so he is likely to favour speeding up reform.
The existing coalition of the PO and the PSL is expected to broadly meet the goal of cutting Poland's general government deficit from 8% of GDP in 2010 to 5.6% this year. However, this is due in part to one-off measures such as the diversion of private pension flows into the state budget. The slowdown in Poland and the wider euro area crisis could knock Poland off course unless further, more structural action is taken. Fitch has forecast a 0.1% growth rate for the euro area as a whole during Q4 this year and Q1 2012.
When Fitch affirmed Poland's sovereign rating in March at 'A-' with Stable Outlook, the agency identified slippage of budget targets and a failure to implement fiscal policy consistent with a stabilisation and then downward trajectory in the government debt-to-GDP ratio as a factor that could lead to negative rating action. The agency still does not expect significant slippage given the expected continuation of the existing coalition government, however, it remains as a key rating driver.
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