The scenario of suspending the president of the National Bank of Poland after being brought before the State Tribunal is hypothetical, but if it happened, the potential implications for Poland’s rating would not be automatic – said Ludwig Heinz, the chief analyst of S&P Global Ratings responsible for Poland’s rating.
– In relation to current events, the independence of the central bank is an important factor, but the most important thing for us is the history of inflation. The outcome of current events is still very uncertain, so we do not want to prejudge anything. The scenario in which the president of the NBP could be suspended from his duties after being brought before the State Tribunal is still quite hypothetical at this point, Heinz said.
He noted that “if this were to happen, but again without prejudging any scenario, any potential rating implications would certainly not be automatic.”
– We would analyze how this situation affects the independence of the central bank and whether it is something that really hinders the effectiveness of monetary policy and weakens credibility. However, there would be no automatic rating downgrade, he noted.
As the chief analyst of S&P Global Ratings added, “we see great strength in the assumptions of the monetary policy implemented in Poland.”
– We believe that the zloty and its liquidity are an important buffer. The central bank has a long history of independence. It also has a very wide range of monetary policy instruments and, from a historical perspective, its inflation performance has been quite solid. Another important advantage in the Polish context is the possibility of a market for debt issued in the local currency. Overall, we assess the credibility of monetary policy and its effectiveness as quite strong, he noted.
The Constitutional Tribunal will consider the request of PiS MPs
The Constitutional Tribunal plans to hold hearings on the procedure for bringing the president of the National Bank of Poland to constitutional responsibility on January 11 and 18. Applications on this matter were submitted by groups of MPs and senators represented by PiS representatives.
They concern, among others: examining the constitutionality of the currently applicable provisions, under which the Sejm adopts a resolution to hold the President of the NBP accountable before the State Tribunal by an absolute majority of votes, which results in the automatic suspension of this person from his duties.
Vice-President of the NBP, Marta Kightley, announced at the beginning of December that in the event of suspension of the President of the NBP in connection with a possible procedure before the Tribunal of State, the Polish central bank will appeal in this case to the Court of Justice of the EU on the violation of EU treaties.
Submitting an application to bring the President of the NBP before the State Tribunal was included in the so-called 100 specifics, the election program of the Civic Coalition. Prime Minister Donald Tusk said in December that a State Tribunal could face Glapiński not for mistakes in monetary policy, but for possible violations of the law. At the same time, he added that his political formation would not do anything that would disturb stability or undermine the reputation of the Polish state in Europe or abroad.
Challenges for Poland’s rating
Among the challenges for Poland’s rating, Heinz from S&P Global Ratings mentions fiscal policy, inflation and the external macroeconomic environment, which is characterized by problems of Poland’s trading partners.
The S&P analyst sees a risk that inflation in Poland will remain elevated for a longer period of time, as core inflation is still quite high. S&P forecasts assume that the CPI in Poland will return to the central bank’s target in 2025.
Heinz also noted that the above-mentioned negative aspects, including a very high fiscal deficit, are balanced by other strengths.
– In the medium term, we see prospects for improving Poland’s relations with the European Union, potentially from the institutional side. According to our criteria, fiscal weakness does not automatically translate into the rating level. This is one of several factors we take into account. Fiscal flows are important, but many other factors are of at least equal or greater importance. The fiscal deficit in 2024 will be very high, but we expect it to gradually reduce after this period. There were also the first signals from the government regarding potential measures that would increase income. Next year, the deficit will remain high, but the fiscal path after 2024 will be more interesting for us, he pointed out.
“The government has sufficient capacity to obtain financing”
Heinz estimates that although Poland’s borrowing needs are very high, the overall debt strategy appears convincing.
– It is based both on the domestic financial system and on increasing foreign emissions. In my opinion, the sentiment of foreign investors may be favorable in this respect, and the government has sufficient opportunities to obtain financing. Another issue is the cost of this financing, which we assume will be higher than in the past. Despite the high borrowing needs, also taking into account the expected inflow of other funds, the debt strategy seems to be feasible – said the S&P analyst.
– We analyze data regarding the general government sector, which also includes non-budgetary items. I believe we have clarity on debt development and overall deficit trends. We will see whether the government will actually reduce the use of extra-budgetary funds. Many of these will likely continue, perhaps slightly reduced. In general assessment, the visibility and transparency of public finances is sufficient,” he added.
The draft budget for 2024 adopted by the government assumed a deficit of PLN 184 billion, with the deficit of the GG sector at 5.1%. GDP. Net borrowing needs in 2024 are estimated at PLN 252.3 billion, and gross borrowing needs at PLN 449 billion.
The S&P agency assumes that Poland will be able to unlock EU funds and takes this element into account in its credit assessment.
– What is important to us at this point is that the rule of law dispute with the European Commission is being resolved, which would mean not only a one-off payment under the Recovery and Resilience Facility (RRF), but also a steady flow of payments from both other EU funds. Ultimately, the key issues remain related to achieving the so-called great milestones. In our analysis, which we published after the last rating review, we assume that Poland will be able to unlock EU funds. We have included this element, but it could bring further benefits if we see progress in addressing some of the issues that have raised concerns in the past, particularly with regard to the judiciary, Heinz pointed out.
The Ministry of Funds and Regional Policy announced last week that in 2024 Poland should receive a total of almost EUR 18.5 billion (approx. PLN 82.6 billion) from the KPO, including almost EUR 8 billion from the grant part. (approx. PLN 35.6 billion), and from the loan part approx. EUR 10.5 billion (approx. PLN 47 billion).
Among the three largest rating agencies, Poland’s creditworthiness is assessed highest by Moody’s – at the “A2” level. Poland’s rating according to Fitch and S&P is “A-“, one level lower than Moody’s. The outlook for all ratings is stable.
Main photo source: PAP/Radek Pietruszka