Moody's cuts Poland's rating as pre-election spending fuels debt concerns
Moody's downgraded Poland to A3, citing large deficits and weak debt affordability as pre-election spending pushes borrowing costs higher.
Poland's credit rating was cut by Moody's on Friday, with the agency pointing to large budget deficits, weakening debt affordability and what it described as a limited willingness or ability to shore up public finances despite buoyant growth.
The downgrade to A3 has drawn attention to the country's fiscal trajectory as it heads toward a closely contested parliamentary election next year. The vote is expected to be competitive, with some of Prime Minister Donald Tusk's coalition allies struggling in the polls, the right-wing PiS losing support and the far-right gaining ground.
Poland's debt-to-GDP ratio of roughly 60% remains well below the euro zone average of 87% recorded by Eurostat. However, fiscal slippage in the region, including post-election budget blowouts in Hungary and Romania, is a growing concern for investors.
"They are running an unsustainably high budget deficit and showing zero appetite to reduce it," said Viktor Szabo, a portfolio manager with Aberdeen.
Markets largely anticipated the downgrade, and Polish local and foreign currency bonds moved sideways on Monday. Still, 10-year Polish bond yields have risen by about 100 basis points this year, reaching 3-1/2-year highs, as a loose fiscal stance compounded the effects of a global bond market sell-off.
The International Monetary Fund expects Poland's strong growth to slow in the coming years. Erste Group economists warned that if global bond turmoil and regional security worries related to Russia escalated, the deterioration in Poland's rating could become a catalyst for a broader sell-off in the local financial market.
Malgorzata Krzywicka, a director at Fitch Ratings, said large deficits, rapidly rising public debt-to-GDP and the absence of a credible fiscal consolidation strategy were all challenges to Poland's rating. She added that the 2027 draft budget, which targets an unchanged deficit of 7.1%, highlights the difficult fiscal position and risks ahead of next year's parliamentary elections. The IMF projects Poland's debt-to-GDP ratio at 77.7% by 2031.
No major party has unveiled how it would rein in borrowing. Sławomir Dudek, head of the Fiscal Council watchdog, compared Poland to a patient with high cholesterol. "Feeling well does not negate bad test results," he said on X. "Simply promising yourself 'I'll get my act together next year' won't improve your numbers."
Societe Generale economist Juan Orts said the winner of next year's election will have little time for complacency. "If the future new government does not present a clear fiscal consolidation plan for 2028, the risk of downgrades will be materially higher," he said.