TEXT-Fitch: Poland's Budget maintains commitment to fiscal prudence

(The following statement was released by the rating agency)

Oct 03 - The increase in the Polish government's expected deficit in its 2013 budget reflects a more realistic forecast of the economy, rather than any weakening in the Polish government's commitment to fiscal prudence, Fitch Ratings says. Slower growth remains the principal risk to successful financial consolidation.

The revision is driven by lower growth forecasts rather than a retreat from consolidation. The budget, approved by the government last week, anticipates GDP rising by 2.2% next year, down from a previous forecast of 2.9%. The resulting lower revenue projections mean the planned budget gap is PLN35.6bn ($11.17bn), up from an original forecast of PLN32bn.

The government has therefore dropped its original target of a 2.2% general government deficit next year. It also confirmed a higher forecast for the 2012 deficit of 3.5% of GDP, up from an original target of 3%. The deficit should then "ease slightly" in 2013 according to reported comments by Finance Minister, Jan Vincent Rostowski.

The revisions bring the government's deficit forecasts closer to our own. We anticipate that the general government deficit will fall, to about 3.2% of GDP in 2013 from an estimated 3.5% in 2012. Similarly, we had already forecast a milder fall in the ratio of general government debt to GDP than the government (54.9% in 2013 compared with their original forecast of 52.5%), and our assessment has not changed materially.

The current coalition government has demonstrated its desire to secure and extend the sustained fiscal consolidation that has already cut Poland's general government deficit from 7.8% in 2010 to 5.1% in 2011. Late last year, it announced measures to increase the transparency and flexibility of the country's medium- and long-term fiscal policy framework to reduce the reliance on temporary or uncertain measures. Pension reform passed in 2012 indicates a broad political consensus in support of structural and fiscal reform. Prime Minister Donald Tusk is expected to outline a second expose of economic policies and reforms later this month, and has said that the need for growth must be balanced with fiscal consolidation.

Weaker-than-expected growth, leading to a substantial shortfall in revenue that is not met by a matching rise in savings, remains the single largest threat to hitting fiscal targets. We have reduced our outlook for 2012 and 2013 GDP growth to 2.5% in both years, with risks on the downside, particularly in 2013.

Poland will still outperform the CEE and EU averages, and the slowdown in growth seen in the second quarter of 2012, when GDP rose 2.4% yoy, down from 3.5% in the first quarter, was driven by a large destocking (which removed 1.5pp from GDP, the worst contribution since 2009) and so may not be repeated in coming quarters.

The eurozone crisis and a consequent slowdown in activity in Poland's trading partners, plus weaker domestic demand, present risks to the economy. Successful budget execution will be important, and given the slower economic growth forecast, government revenue forecasts may be optimistic.

We affirmed Poland's 'A-' rating with Stable Outlook in February. ((Bangalore Ratings Team, Hotline:+91 80 4135 5898 Jyothsna.BN@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Jyothsna.BN.thomsonreuters.com@reuters.net))