Rating action

Scope Ratings GmbH (Scope) has today affirmed the Republic of Poland’s long-term local- and foreign-currency issuer and senior unsecured debt ratings at A, and maintained the Stable Outlook. The short-term issuer ratings have been affirmed at S-1 in local- and in foreign-currency, with Stable Outlooks.

The affirmation of Poland’s credit ratings reflects sound macroeconomic fundamentals and comparatively strong longer-run trend growth. Moderate levels of public debt and financing requirements, a sizeable cash cushion and deep domestic capital markets are additional credit strengths. Moreover, Poland’s ratings are anchored by a profitable, liquid and well-capitalised domestic banking system.

The main credit challenges reflect: i) persistent long-run uncertainties concerning the path of governance amid continued institutional divisions and forthcoming elections, despite recent significant improvements of the relationship between the government and EU institutions; ii) sustained elevated budgetary deficits, an expected upside trajectory of the government-debt ratio, and a comparatively weaker structure of debt; iii) challenges concerning the governance of the central bank and effects for monetary and financial-system governance; and iv) economic and geopolitical risk after escalation of Russia’s war on Ukraine.

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Key rating drivers

Strong macroeconomic fundamentals and robust economic-growth outlook. Poland’s credit ratings are anchored by a large, diversified economy and comparatively strong macroeconomic fundamentals. Economic growth decelerated markedly last year, under the context of heightened price pressures, comparatively tight funding conditions and weak household consumption and investment. After moderating to 0.2% growth last year, growth started to recover during the second half of last year with 1.3% growth YoY (based on seasonally and calendar-adjusted data) by Q1 2024. Recent recovery has been driven by improvements of household consumption, given improving real incomes, and to a lesser extent by government consumption, while investment remains subdued. Over the remainder of this year, Scope anticipates moderate growth, benefitting from a resilient labour market and near record-low unemployment, strengthened investment following the restart of EU fund inflows, and moderate external demand, with output growth of 2.5% forecast for this year before 3.1% next year. The longer-run economic growth outlook assumes trend growth of a sturdy 3% a year.

Under the pro-EU coalition of premier Donald Tusk, there has been some progress around institutional reforms. At the end of February 2024, EUR 137bn of EU recovery and cohesion funds were unblocked and, by mid-April, EUR 6.3bn of the available EUR 59.8bn from the Recovery and Resilience Facility were disbursed. These positive developments reflect the EU recognising steps taken regarding the independence of the judicial system and on audit and control systems. By the end of May, Poland formally exited the Article 7(1) sanctions procedure for the rule of law after more than six years.

Liquid, profitable and well-capitalised banking system. The credit ratings of Poland are anchored by a stable banking system, with resilient asset quality through the pandemic crisis allowing for the gradual removal of crisis relief policies. Despite the pandemic crisis, the quality of the credit portfolio has stayed resilient over the recent years and the non-performing loan ratio edged under their pre-2020 levels, reaching 4.1% of aggregate loans by Q1 2024. Despite some declines since mid-2023, capitalisation remains strong, and above pre-pandemic crisis averages, as reflected by a tier-1 ratio of 16.6% of risk-weighted assets in Q1 2024. Liquidity has strengthened with the liquidity coverage ratio reaching highs of 240.1% by Q1 2024. System-wide return on equity improved from 9% at end-2022 to 18.5% by Q1 2024, driven by rises of net interest margins.

Housing-price growth had decelerated towards the end of 2022 and over the first half of 2023. After the introduction of the ‘Safe Credit’ mortgage-subsidy programme, introduced by an outgoing Law and Justice (PiS) government in July 2023, housing-price growth re-accelerated from 1.9% YoY in Q2 2023 to 13.9% YoY by Q1 2024. In large cities such as Warsaw, the increase was even greater, seeing growth of 3% to 20.5% over the same period. The development ministry of the current government has unveiled plans for a new mortgage subsidy scheme aimed at first-time home buyers – for launch potentially early next year. Nevertheless, there are expressions of concern that the scheme might place further upside pressure on home prices, already rising at the fastest pace in Europe.

Rating challenges: long-run governance uncertainties, rising public debt and comparatively weak debt structure, challenges for central-bank governance, and geopolitical risk.

Despite the Tusk coalition’s election victory and a resulting near-term improvement of relations with the EU, long-run governance uncertainties remain especially given significant institutional divisions and elevated political polarisation. PiS retains significant power and leverage across State institutions. PiS judges appointed during the previous eight years continue to hold positions of power across the court system and former party member Andrzej Duda is president until August 2025. This curtails the Tusk government’s ability to adopt reforms near term.

Challenges around the governance of the central bank and effects for monetary and financial-system resilience are also a concern. At the end of March 2024, a group of lawmakers sent a motion to place PiS-appointed Adam Glapiński, governor of the National Bank of Poland, on trial before a State Tribunal around an accusation that monetary loosening ahead of elections was politically motivated. This process can take up to a year. In December 2023, ECB President Christine Lagarde responded to Glapiński that the Statute of the European System of Central Banks and the ECB guarantees the independence of national central-bank governors and that this statute provides a legal shield against potential prosecution by the Sejm.

In addition, although the stock of Polish general government debt is moderate, sustained elevated budget deficits and an expected upside path of the government debt ratio, alongside a comparatively weak structure of the government debt, reflect rating constraints. After remaining comparatively stable last year, at 49.6%, general government debt-to-GDP is seen resuming an upside path from this year on, rising to 61.8% of GDP by end-2029. The budget deficit is seen staying elevated at 5.1% of GDP this year before 4.8% by 2025, after 5.1% last year, reflecting only a gradual phase-out of energy price caps and recovering government revenue growth. Poland was assigned an Excessive Deficit Procedure this month.¹ The scale of budgetary consolidation ought to stay restricted given the 2025 presidential-election year ahead of critical general elections by 2027.

Finally, economic and geopolitical risks following escalation of Russia’s war on Ukraine remain relevant for sovereigns such as Poland, as captured by elevated defence expenditures to address security threats.

Outlook and rating sensitivities

The Stable Outlook represents the view that risks for the ratings over the next 12 to 18 months are balanced.

Downside scenarios for the rating and Outlooks are if (individually or collectively):

1. Weaker budget discipline results in deterioration of the outlook for debt sustainability;
    
2. There is re-escalation of governance challenges amid heightened political polarisation; and/or
    
3. A global or regional shock adversely affects growth and/or significantly weakens Poland’s external-sector risk profile.

Upside scenarios for the rating and Outlooks are if (individually or collectively):

1. Fiscal performance improves materially, supporting a structurally-declining trajectory for the government debt ratio;
    
2. Governance challenges are durably reduced; and/or
    
3. The economy’s external balance sheet were to further strengthen.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘a’ for Poland. Under Scope’s methodology, this initial indicative rating receives: i) no further adjustment from the methodological reserve-currency adjustment; and ii) no negative adjustment from the methodological political-risk quantitative adjustment. On such a basis, a final SQM quantitative rating of ‘a’ is assigned for Poland and next reviewed by the analyst-driven Qualitative Scorecard (QS) – where this rating can be adjusted by up to three notches up or down depending on the significance of Poland’s qualitative credit strengths or weaknesses compared against an SQM-assigned peer group of sovereigns.

Scope identified the following relative credit strengths of Poland via the QS: i) growth potential and outlook; ii) macro-economic stability & sustainability; and iii) current account resilience. Conversely, the following QS relative credit weaknesses of Poland were identified against the sovereign’s peer group: i) monetary policy framework; ii) resilience to short-term external shocks; and iii) governance factors. On the aggregate, the QS generates no net adjustment for Poland’s credit rating, concluding in final A long-term issuer ratings.

A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process via the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

In respect to environmental factors, Poland receives below-average scores under the SQM based on an index of the economy’s carbon emissions per unit of GDP (capturing the scale of an economy’s transition costs to greener economic structures over coming decades) by virtue of a global comparison, and very-weak scores on the greenhouse gas emissions per capita factor. Likewise, Poland receives comparatively weak scores on the SQM as concerns the ecological footprint of the economy’s consumption compared against available biocapacity. However, SQM environmental scores for natural disaster risk, as captured by indices published by the Notre Dame Global Adaptation Initiative, are comparatively strong, reflecting a comparatively lesser exposure to such natural-hazard risk than many countries globally. Under the Tusk government, Poland has committed itself to ambitiously reducing carbon emissions by 75% by 2030 compared against 2022 levels and supports EU climate policy rather than challenging it in courts. Aside from the SQM assessment of environment, under the complementary QS – a ‘neutral’ assessment has been assigned on the ‘environmental factors’ analytical category of Poland against the nation’s sovereign peer group.

Credit factors associated with social criteria are furthermore captured by the quantitative model and qualitative overlay alike. Under the quantitative model, Poland performs above a global median on income inequality and labour-force participation. Poland receives a weak score under the SQM for its old-age dependency ratio, although performance on this variable is also weak across many advanced-economy SQM sovereign peers of Poland. Social factors are furthermore reflected in comparatively strong GDP per capita under the SQM as evaluated on purchasing-power-parity bases. The working-age population has been declining around 0.6% annually over the last decade, creating a growing skilled-labour shortage. But large-scale inflows of migrant workers – especially from Ukraine – have helped restrain wage pressures and eased demographic bottlenecks. While a net present value of expected pension spending changes is benign at -8.7% of GDP from 2023-50 under IMF projections, the net present value of health-care spending changes is more material at +31.7% of GDP over the same forecast period.² Polish students performed well on the 2022 OECD Programme for International Student Assessment study of the scholastic performance of 15-year-olds across mathematics, science and reading, ranking 15th of 81 nations³, although performance was slightly weaker than in 2018. On the complementary QS, Scope assigns an evaluation of Poland’s ‘social factors’ sub-category as ‘neutral’ compared against the performance of sovereign peers.

Under governance-related factors captured by the SQM, Poland receives average marks on World Bank Worldwide Governance Indicators (WGI), although index scoring has dropped since 2014 (the year prior to Law and Justice entering government) across each of the six WGI sub-categories, with declines especially pronounced on voice & accountability, political stability and the rule of law (latest data being 2022 ahead of parliamentary elections last year). The Tusk government has presented an Action Plan on the Rule of Law and there is initial progress on associated reforms. Geopolitical risks have risen across the eastern Europe region including for Poland after escalation of the Russia-Ukraine war. Under the complementary QS, Scope assesses the ‘governance factors’ analytical category as ‘weak’ compared against the SQM-assigned sovereign peer group.

Rating committee
The main points discussed by the rating committee were: i) rating history; ii) budgetary and debt outlook; iii) governance and EU-funding outlook; iv) monetary governance; v) external sector; vi) economic outlook; vii) forthcoming elections; and viii) sovereign peers considerations.

Rating driver references
1. European Commission: Commission opinion on the existence of excessive deficit in Poland
2. International Monetary Fund: Fiscal Monitor (April 2024): Fiscal Policy in the Great Election Year
3. OECD: Programme for International Student Assessment (PISA)

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 3.0), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party Participation    YES
With access to internal documents                                  YES
With access to management                                           YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Dennis Shen, Senior Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 2 June 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.  

Conditions of use / exclusion of liability
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