Incomprehensible decision of one of the rating agencies

Incomprehensible decision of one of the rating agencies

Incomprehensible decision of one of the rating agencies

The decision of the rating agency Standard and Poor's  about lowering credit rating of Poland is incomprehensible from economic and financial analysis point of view. This decision is contradictory to assessments presented by other rating agencies, the biggest international financial institutions and financial market participants. The decision is all the more incomprehensible as it was not preceded by changes of rating outlook, which was positive prior to that decision.  In MoF's opinion attitude of the agency to the dialogue with the Polish authorities about doubts raised by the agency over the so-called political climate is disappointing.

On 15th January 2016 rating agency Standard & Poor's announced a decision about lowering Poland's credit rating from A- to BBB+ for long term liabilities in foreign currencies and from A/A-1 to A-/A-2 for long and short term liabilities in local currency respectively. At the same time rating outlook has been changed from positive to negative.

After the S&P's decision, the Fitch rating agency announced its decision. It confirmed unchanged ratings of Poland at the levels of A- and A (for liabilities in foreign and local currency, respectively) with stable outlook, while Moody's, after indicating 15th January this year as a possible rating action date for Poland, did not see any reasons for preparing and publishing the report including analysis of Poland's situation. Other rating agencies evaluating Poland have not changed either rating or outlook recently (the last report of Japanese agency JCR is from 25th January 2015, Japanese R&I from 18th September 2015 and Canadian DBRS from 11th December 2015)

S&P report that justifies the decision indicates that the agency remained unchanged assessment of Poland's crucial rating factors used for assessing sovereign creditworthiness, according to its methodology, when compared to report published in August 2015. Assessment of institutional, fiscal, macroeconomic and external factors remained neutral, while monetary assessment was still marked as "strength", similarly to the previous report.

S&P's medium term forecasts of economic growth do not differ significantly from the view presented by other rating agencies and international institutions. World Bank forecasts published on 8th January this year indicate that Poland will achieve the highest GDP growth in the region. Similar assessment was presented by the International Monetary Fund on 13th January: Obligatory review (…) confirmed strong fundamentals of Polish economy and appropriate macroeconomic policy. Thus International Monetary Fund confirmed enhancing the access to Flexible Credit Line (in lower amount of USD17.9bn, requested by Poland), which is available exclusively to countries with exceptionally stable macroeconomic fundamentals and effective economic policy.

S&P in its report draws attention also to other macroeconomic and fiscal indicators, forecasting further improvement or stabilization in the nearest 4 year perspective. According to the agency budget situation will be stable (deficit to be lower from 3.2% of GDP in 2016 to 2.9% in 2019, as well as indebtedness which as a ratio to GDP will remain in the range of 51.7-52.0% at the same period). Negative current account balance will be in a safe range of 1.3-1.8% of GDP, unemployment is expected to  fall to 7.7% in 2019, investment grow from 20.7% of GDP in 2016 to 21.6% in 2019. Similarly savings will grow (from 19.4% of GDP in 2016 to 19.9% in 2019) as well as export (from 48.9% of GDP in 2016 to 49.9% in 2019) and foreign direct investments are to be stabilized at the level of 1.2% of GDP.   

Announcement of the IMF official from 13th January this year remains in the same tone, saying that Poland's current account deficit has fallen, strengthening further economic fundamentals, whilst currency reserves remain at the adequate level. Fiscal consolidation led to abrogation of excessive deficit procedure, and public debt level is balanced. Banking system is liquid, profitable and well capitalized, and the framework of functioning financial sector has been  strengthened.

Financial markets priced Poland's risk according to the assessment of other rating agencies, World Bank and IMF, which was proved by recent good results of the sale of Treasuries – 5-year bonds worth PLN 4.55bn with demand at the level of PLN 7.24bn and 2.38% yield were sold on auction held on 7th January this year; there was a long term Eurobond's issue consisting of 2 tranches on 8th January this year: 10-year bonds worth EUR 1bn with 1.54% yield and 20-year bonds worth EUR 0.75bn with 2.47% yield. Aggregated investor's demand amounted to EUR 2.3bn. Levels of Credit Default Swaps do not indicate deteriorated of creditworthiness of Poland as well, which in the last several months have been quoted at the level of 70-80 basis points for 5-year contracts. Even on 14th January 2016 financial market participants estimated the probability of lowering the rating outlook by S&P at only 30% (according to Reuters news agency's questionnaire). Possibility of lowering the credit rating of Poland as such did not cross any market participant's mind.

Arguments presented by S&P justifying the decision on lowering the rating consider only changes in political sphere in Poland. S&P did not raise these concerns either during conference call with Poland's officials in December last year or ever since. Ministry of Finance declared its openness to discuss  agency's doubts related to political risks. According to agreement with rating agency  such discussion should take place before the  final decision about rating changes is done. However the discussion before announcing the decision has not been held.   

In the last several years S&P made unusual and controversial decisions. The most significant one was lowering (and keeping at the lowered level until now) credit rating of the United States in August 2011 (as the only agency out of the so called Big Three). But that decision was preceded by standard action of changing the credit outlook firstly to negative and later lowering the rating as such.