Morningstar DBRS Confirms Republic of Poland at "A", Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Republic of Poland's Long-Term Foreign and Local Currency -- Issuer Ratings at "A". At the same time, Morningstar DBRS confirmed the Republic of Poland's Short-Term Foreign and Local Currency -- Issuer Ratings at R-1 (low). The trend on all ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS

The Stable trend reflects Morningstar DBRS' view that Poland's economic outlook remains sound over the medium-term, notwithstanding the stronger external headwinds from tariffs and subdued demand from key European trading partners. Over the next few years, Poland's economy is set to benefit from the resumption of EU transfers and robust domestic demand. The latter will be supported by continued strong real wage growth and high public spending. The fiscal deficit is set to remain wide over the forecast horizon, with the anticipated consolidation path slowed by structurally higher defense and social expenditure. The IMF projects Poland's fiscal deficit to remain over 6% of GDP this year. Still, we expect the country's debt burden to remain at an overall moderate level over the medium-term.

Poland's membership of the European Union (EU), credible defense capacities, and strong growth record support the credit ratings. The current government -- in office since late 2023 -- has started to repair the country's previously stressed relationship with the EU, which had expressed concerns over the country's rule-of-law and political influence over judicial institutions. Poland has recently met early reform milestones that will allow for the disbursement of Resilience and Recovery Funds. The upcoming presidential elections over the next month will likely determine the current government's ability to make more comprehensive reforms in order to meet EU rule-of-law standards and address economic challenges. In Morningstar DBRS' view, Poland has sufficient external buffers, which support the country's capacity to mitigate adverse external shocks. At the same time, the economy's comparatively low income per capita levels, increasingly unfavorable demographics, and wide structural fiscal deficit constrain the credit ratings.

CREDIT RATING DRIVERS

Morningstar DBRS could upgrade the credit ratings if: (1) fiscal consolidation results in a significant reduction in the public debt burden; or (2) structural reforms bolster the economy's growth potential and result in a sustained improvement of the institutional framework.

Morningstar DBRS could downgrade the credit ratings if: (1) the public debt burden materially increases beyond our current expectations; or (2) the reemergence of problematic relations with the EU reduces EU funding and economic growth prospects over a prolonged period.

CREDIT RATING RATIONALE

Pivotal Presidential Elections Upcoming; Current Government Improved EU-relations but Faces Domestic Opposition to Deeper Reforms

Since the last election in late 2023, the government, led by the center-right Civic Coalition (KO), has taken steps to address concerns over judicial independence and prioritized improving relations with the EU. While the current government's progress on rule-of-law issues has already led to the unlocking of EU funds, there is uncertainty over the government's ability to implement a more comprehensive set of reforms needed to fully meet EU rule-of-law standards. The country's president holds veto powers over major legislative initiatives. In recent years, there has been political gridlock, as the government and president have been from opposing political camps. The outcome of the upcoming presidential elections (the second round is expected to be on June 1, 2025) will likely determine the current government's ability to continue the proposed rule-of-law and economic reform path until the next parliamentary elections in late 2027. According to recent polls, the government-supported presidential candidate is ahead by a substantial margin. Morningstar DBRS takes the view that political uncertainty and polarization in Poland will likely remain elevated, even after the presidential vote, and further progress on institutional reforms to meet EU rule-of-law standards may only be made gradually.

Poland's Worldwide Governance Indicators are relatively weak compared to EU peers. Nevertheless, Poland benefits from its membership in the EU, including access to the EU's single market, freedom of movement, and common trade policies with the rest of the world. Morningstar DBRS takes the view that external security risks for Poland are adequately mitigated by its own national defense capacity and credible bilateral commitments with the U.S. and European countries. Poland, sharing direct borders with Russia and Belarus, has prioritized the strengthening of national defense capabilities since the beginning of the Russia/Ukraine war in 2022, which has contributed to the growth in defense spending in recent years.

Poland's Fiscal Consolidation Slowed by Continued High Defense Spending amid Looser EU Fiscal Rules; Public Debt Burden to Rise

Morningstar DBRS anticipates Poland's fiscal deficit to remain wide over the medium term. This is partly due to defense spending. Poland is one of the biggest defense spenders (relative to economic output) in NATO, with defense expenditure set to hit about 5% of GDP this year and in 2026. Morningstar DBRS expects that Poland will opt to utilize exemptions for higher defense spending under EU fiscal rules, which will likely lead to less fiscal consolidation compared to current government commitments. Spending has also risen due to the government's decision to follow through on its election promises to increase wages of public sector employees and deliver additional social benefits. Moreover, investment needs for public infrastructure are high, although they will be supported by significant inflows of EU-financed subsidies. In this regard, Morningstar DBRS expects that Poland's budget can benefit from a partial reallocation and resultantly swifter absorption of EU-investment subsidies to defense-related purposes. The IMF projects that Poland's fiscal deficit will be 6.2% of GDP this year (after 6.6% in 2024) and gradually narrow to 4.1% of GDP in 2028.

Poland is expected to pursue a gradual fiscal consolidation over the medium term. In its most recent medium-term fiscal plan from late 2024, the government outlined a narrowing of the fiscal deficit from around 6% of GDP in 2025 to 3% by 2028, in line with the EU's requirements under the Excessive Debt Procedure (EDP). Reaching the projected consolidation targets would require additional measures amounting to around 1% of GDP per year to be implemented over the next few years. Morningstar DBRS anticipates that Poland could deviate from the planned consolidation path in order to account for higher defense spending and opt to activate the National Escape Clause under the Stability and Growth Pact, as recommended by the EC's guidance under the EU's common defense strategy (ReArm Europe Plan). Morningstar DBRS views positively recent initiatives to improve fiscal governance, such as increasing transparency over extra-budget accounts, establishing a fiscal watchdog authority (expected for 2026), and creating an anti-grey-economy taskforce.

Morningstar DBRS anticipates that Poland's public debt burden, while remaining at moderate levels, will rise materially over the next few years. The large fiscal deficits and rising interest costs outweigh the countervailing effect of high economic growth on public debt dynamics. The IMF projects Poland's gross general government debt to reach 60% of GDP in 2025 and to rise to 67% in 2028. Interest payments are projected to rise from 2.3% of GDP in 2024 to 2.7% in 2028. Around three quarters of Poland's state debt are denominated in domestic currency, which limits currency risk. Poland's foreign currency public debt consists predominantly of EUR-denominated bonds, but also loans from EU institutions. Morningstar DBRS expects that Poland will receive a material share in subsidized EUR-loans under the EU's defense-related SAFE EUR 150bn financing envelope and additional loans from the European Investment Bank (EIB). This will help contain financing costs to some degree over the next few years. The cash buffer under management of the state treasury (amounting to about 5% of GDP), together with buy-backs at switch auctions, cover about 56% of Poland's gross financing needs in 2025 as of March. An elevated share of total state debt is variable-rate (29%) and the average maturity of domestic state debt is relatively low at 4.2 years (avg. maturity of foreign debt is much longer at 11 years). This means that there is a relatively quick pass-through from changes in interest rates to public interest costs.

Strong Economic Growth Supported by Robust Domestic Demand and High Investments; US-Tariffs Add to Weak External Environment

Poland's growth outlook is set to remain robust over the next two years. Domestic consumption is expected to strengthen and EU-fund inflows will support large investments. Households' incomes continue to benefit from elevated wage growth and slowing inflation. Government spending looks supportive in the short-term. Moreover, high inflows of EU-investment subsidies - grants and loans of ca. 12% of GDP available to spend over the next few years - will boost investment. Compared to many EU peers, Poland's economy is less susceptible to the direct negative effects of U.S. tariffs given it is less reliant on auto exports. However, Poland is affected through lower trade volumes via larger EU economies, like Germany. According to central bank (NBP) estimates, exports to the U.S. account, through direct and indirect trade flows, for about 3% of Poland's gross value-added. Still, weak external demand from key European trading partners like Germany will continue to weigh on Poland's industrial exporters, likely limiting contributions from exports to Polish growth at least over the next year. The IMF projects Poland's real GDP growth to accelerate to 3.2% in 2025 and to remain elevated at around 3% p.a. through 2030.

Nevertheless, the Polish economy faces structural challenges to continued high growth. These include an increasingly restricted supply of labour, regulatory hurdles to investment, and global competitiveness pressures. Strong wage increases have outweighed productivity gains amid a tight labor market in recent years. In addition, Poland's ageing workforce will likely start to weigh on economic growth potential. While there are significant investments to increase domestic energy production capacities over the longer-term, energy costs remain high in a global context after the cut-off from Russian supplies in 2022/2023. Like its European peers, Poland's manufacturing sector has had to adapt to technological transitions and is generally facing higher direct competition from non-EU countries. Poland had one the lowest investment rates in the EU, averaging just 18% of GDP over the past decade. Nevertheless, Morningstar DRBS anticipates that Poland could benefit from other major international policy shifts over the medium term, like the large European defense-driven fiscal stimulus in conjunction with the shift to EU-domestic procurement and a potential reconstruction of neighboring Ukraine.

Balanced External Accounts and Robust International Balance Sheets Mitigate External Vulnerabilities

Morningstar DBRS expects that Poland's external position will remain sound over the medium term, withstanding the stronger headwinds in the international trade environment. The IMF projects a small current account deficit of around 1% of GDP on average over 2025-2030. At the same time, Poland is set to receive significant inflows of EU-funds over the next few years. Poland's structurally large service export surplus (4.8% of GDP in 2024) offsets structural outflows resulting from the foreign profit income generated on the inward FDI stock in Poland (about 45% of GDP) and typically smaller deficits in goods trade balances. FDI inflows moderated in 2024 due to deleveraging and fewer new investments, after very high inflows over the past three years. Gross external debt is comparatively low, thereby limiting external vulnerabilities. On the assets side of the IIP, the National Bank of Poland (NBP) holds EUR- and USD-denominated reserve assets amounting to around 25% of GDP as of YE2024. Overall, Poland's net IIP stood at -29% of GDP at the end of 2024, narrowing significantly from around -70% of GDP a decade ago. This was largely the result of the Polish economy's diminished reliance on external financing and the continued accumulation of official reserves.

In Morningstar DBRS's view, Poland's adequate stock of official reserves and exchange rate flexibility serve as adequate buffers against potential adverse external shocks and provide a sufficient degree of flexibility for the Polish economy to adjust to changes in the international environment. The NBP stands ready to occasionally intervene in episodes of heightened volatility, as happened in 2022. Additionally, Morningstar DBRS anticipates Poland could receive renewed access to a EUR-PLN swapline with the ECB in episodes of heightened external uncertainty (like it did in 2022 at the onset of the Russia/Ukraine war), which further mitigates external vulnerabilities.

Inflation Slowly Converging on Target Raises Scope for Monetary Policy Easing in 2025; Financial Stability Risks Contained

Over the next year, inflation is set to approach the policy target range (with 3.5% being the upper threshold), thereby increasing the scope for an easing of monetary policy. The Polish central bank (NBP) lowered its key policy rate to 5.25% in May, which was the first change in the policy rate since October 2023. Inflation remained elevated over the past year, with monthly inflation rates sticking close to 5%YOY (national CPI definition) since the second half of 2024. Still, energy prices look set to moderate later in 2025 due to base effects after an unfreezing of national administered prices for electricity and gas in July 2024 and a decline in global energy prices. Also, decelerating nominal wage growth (after +13%YOY in 2024) will gradually exert less pressure on services prices. The IMF projects inflation at 3.7% at year-end in 2025 and to gradually converge to the policy target rate of 2.5% by 2028. Morningstar DBRS takes the view that more restrictive U.S. trade policies could lead in the short term to additional downward pressure on inflation, given the additional supply from excess exports capacities in Asia and lower global energy prices. Upside risks persist from services wage growth and the potential increase in debt-financed defense spending across Europe.

Comparatively high interest rates have challenged property owners who borrowed during the low-rate period and at variable rates (roughly 90% of mortgages). However, financial stability risk from higher rates appears contained. Household indebtedness is low, wage growth is strong, and the Borrowers Support Fund helps shelter vulnerable borrowers from the rise in mortgage payments. Costs to the Polish banking system stemming from the legal risk on foreign-exchange mortgages are potentially material and uncertainty remains elevated. The size of bank losses will depend on local court decisions, as well as rulings from both the Court of Justice of the EU and the Polish Supreme Court. In the meantime, the banking sector has increased provisions to cover the remaining Swiss franc denominated mortgage portfolio. In Morningstar DBRS' view, the legal decisions will play out over many years, and the banking system's provisions against this risk specifically and the high capitalisation more broadly are important mitigants of systemic risk.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

ESG Considerations had a significant effect on the credit analysis.

Social (S) Factors

The following Social factor had a significant effect on the credit analysis: Human Capital and Human Rights. Poland's GDP per capita is relatively low compared to its EU peers, estimated at around USD 26,800 in 2025. Morningstar DBRS considers this factor significant and has taken it into account within the Economic Structure and Performance Building Block.

Governance (G) Factors

The following Governance factor had a significant effect on the credit analysis: Institutional Strength, Governance and Transparency. Poland ranks relatively weakly in the Worldwide Governance Indicators (WGI) assessments by World Bank compared to EU peers, reflecting continued shortfalls of adhering to rule-of-law principles. Morningstar DBRS considers this factor significant and has taken it into account within the Political Environment; and Fiscal Management and Policy Building Blocks.

Since the last rating action the relevance or significance of the following Governance Factor changed: The Peace and Security factor has changed to relevant. Morningstar DBRS takes the view that Poland would likely respond to hostilities with neighbouring governments as indicated by the expansion of national defense capacities and increased border security in recent years. The related higher defense spending is contributing to a higher public debt burden and weaker assessment of the Debt and Liquidity Building Block.

There was no Environmental factor that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

For more information on the Credit Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments. https://www.dbrsmorningstar.com/research/453737.

Notes:
All figures are in Polish zloty (PLN) unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments (15 July 2024) https://dbrs.morningstar.com/research/436000. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include National Bank of Poland (NBP): Inflation Report (March 2025), Financial Stability Report (December 2024), Balance of Payments Report (4th quarter 2024), Report on monetary policy (2023); Ministry of Finance of the Republic of Poland: Report on the implementation of the Medium-Term Fiscal-Structural Plan (April 2025), State budget borrowing requirements financing plan (April 2025), Medium-Term Fiscal-Structural Plan 2025-2028, Public Finance Sector Debt Management Strategy 2025-2028; Statistics Poland (GUS); International Monetary Fund (IMF): Staff Report for the Art. IV Consultation (2024), World Economic Outlook (April 2025); World Bank (WB); European Commission: Economic Forecast (Autumn 2024), Rule of Law Report: Country Chapter on the rule of law situation in Poland (2024), Eurostat; European Central Bank (ECB); Bank for International Settlements (BIS); Politico; AlTi Global Social Progress Index; Macrobond. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: YES
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/453736.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Marius Schulte, Assistant Vice President - Global Sovereign Ratings
Rating Committee Chair: Michael Heydt, Senior Vice President, Sector Lead - Global Sovereign Ratings
Initial Rating Date: 11 December 2015
Last Rating Date: 08 November 2024

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