Moody's downgrade Poland's economic outlook on fiscal risks

Moody’s, a credit rating organization, has decided to cut the outlook for the Polish economy, mainly on fiscal risks associated with approved child subsidy scheme and planned lower retirement age, which shall lead to increase in government expenditures.

Also, risks of deterioration in business environment due to the dodging legal and regulatory framework, lead to lowering of credit rating outlook. Moody’s stressed the importance of foreign financing for the Polish economy and thereby risks from bond outflows in the first months of the year. The rating agency’s decision is a clear indication of the risks that pose threats to materialize in the near term.

The uncertainty also means that the relief rally was short-lived and shallow. Risk premium embedded in Polish asset prices must necessarily remain high, Commerzbank reported.

The Polish economy saw employment rising by 2.8 pct y/y, in line with market expectations. Also, additional 3,000 jobs were created on a monthly basis, which is still quite high given negative seasonal pattern visible in April in last few years.

In April, average wage growth surged from 3.3 pct to 4.6 pct y/y, beating estimates of 3.8 pct. The rise is attributable to low statistical base in manufacturing with a possible addition of catching up after a very poor March data. Also, strong growth in biggest service categories exhibited strong wage growth this year across trade, transport, hotels and restaurants, leading to upswing in wages.

The proximity of Polish ratings revisions is another factor to keep a close look at. The bigger picture is unclear, political risk is tough to estimate.

"Potential longer term consequences (political, economic) can be quite severe, "Commerzbank said in a recent report.