Poland's polarisation hurts fiscal consolidation, S&P says

WARSAW (Reuters) -The Polish government's willingness to reign in a bloated deficit may be sapped by the fear of losing elections, S&P's expert on Central/Eastern Europe said on Tuesday, amid political polarisation in the country.

S&P's outlook for Poland remains stable at an 'A-' rating, owing to solid growth prospects, the strength of the economy's external position, as well as a credible monetary policy, Karen Vartapetov, S&P lead analyst for CEE & CIS countries said during a capital markets conference.

However, he pointed to the high deficit as a concern.

"Risks to the Polish ratings are in balance ... but fiscal challenge is there, and in the medium term, they can put pressure on the ratings," he said, adding that balancing budgets was a concern in Central/Eastern Europe as a whole.

"So far, we are not in a rush to adjust the ratings for Poland, but would like to see a direction of travel and potentially, an announcement of a new fiscal consolidation package, which the government seems to be committed to in the medium term."

S&P expects Poland's general government deficit to fall to 6.1% of gross domestic product (GDP) in 2025, from the European Union's second-highest of 6.6% last year. Poland has pledged to meet the EU's limit of 3% of GDP by 2028, by growing its economy.

But the deep polarisation in Polish politics, evident in the presidential election run-off vote scheduled for Sunday that pits liberal Rafal Trzaskowski against nationalist Karol Nawrocki, makes reigning in deficits politically risky.

FISCAL MEASURES

"Loose fiscal policy is the cost which the government or the Polish economy has to pay for this extremely, extremely polarized society," he said.

"So the government is not able to contain fiscal expenditures or rule out some of the fiscal measures from the past. It is because you risk losing your, you know, elections immediately," he added.

Aside from softer than pre-pandemic economic growth in nominal terms hurting budget inflows, he pointed to the spending side, not limited to Poland's growing debt servicing costs and military outlays, NATO's highest in proportion to the economy.

"This is not only defense expenditures, but also the legacy of the pandemic. So very generous social transfers to households, the businesses, and they are still there, especially if we talk about wages and pensions," Vartapetov said, adding that in the longer-term age-related spending would rise.

"Once the super electoral cycle is over, there will be a window of opportunity, even if it's narrow, maybe one year, two years before the next electoral cycle kicks in, for the government to come up with some medium-term fiscal adjustment. And this is our assumption behind the existing ratings for Poland."

Poland's current Brussels-oriented ruling coalition took power in late 2023, ending eight years of conservative rule. Poles also went to the ballots in local elections and a European Parliament election in 2024, while the next parliamentary election is expected in 2027.

(Reporting by Karol Badohal; Editing by David Holmes)