Still good but riskier
A week ago[i] China’s most known credit rating agency Dagong Global Credit Rating Co., Ltd. (Dagong for short) has announced its negative outlook for polish government bonds. Dagong maintained A and A- credit ratings for both local and foreign currency bonds respectively, but emphasised that the foreign investment structure of Poland might deteriorate in the future.
Negative outlook for polish sovereign credit is caused by the following reasons:
- Dagong believes that ruling polish Civic Platform Party is likely to win upcoming parliamentary elections which should facilitate further social security reform and privatization in the mid-term.
- Short- and medium-term growth in polish economy is expected to steadily decline and long-term outlook is uncertain at this point. Dagong expects growth rate to be around 4.2% in 2011 and 3.0% in 2012. However, long-term imbalance between consumption and investment, too high foreign fund control over major industries and ageing population will probably be a big drag on economic growth in later years.
- There is a risk of erosion of the banking system due to lowering of asset quality and excessive reliance on external financing. Rating agency emphasized that nonperforming loans ratio increased from 4.5% in 2008 to 8.8% in 2010, which equates to a staggering annual growth rate of 40%.
- Debt burden of the government looks stable in the mid-term but a cautious investor should not neglect the risk of rapid growth of foreign debt. Agency predicts that in 2011 and 2012 the debt ratio of the public sector will likely be kept at around 54.8%.
Poland’s debt servicing at risk
Positive growth rate and political stability are factors that will allow the polish government to finance its spending through debt issues in the short- and mid-term.
However, external financing is highly dependent on short-term funds supplied by securities investment funds. This in turn forces a continuous growth of foreign debt, which coupled with Poland’s current account deficit and relatively low foreign exchange reserves will make the government significantly less capable to service its debt in the future.
All those factors point to a conclusion that Poland is obviously vulnerable externally, so it should not be a surprise that Dagong changed its outlook on polish debt to negative.