Moody's credit rating downgrade doesn't affect the Polish zloty

As expected, Moody's has lowered the outlook for Poland's credit rating from stable to negative.This seemed very likely, given earlier warnings, the agency's highest rating among the so-called "Big Three," and Fitch's earlier decision two weeks ago. While this isn't exactly good news for the Polish economy, at least for now, it doesn't do any harm, which is also being felt in the markets. The złoty remains stable and responds more to international developments. What's next for the Polish zloty in the coming weeks?

Moody's Agency She highlighted several key aspects in her decision. She pointed, of course, to the growing budget deficit, which, according to government forecasts, is expected to reach 6,9%, compared to the originally planned 5,5%. Next year, the planned figure is expected to be slightly lower, at 6,6%, which is also indicated by the agency's own forecasts.Nevertheless, this is still expected to be one of the highest deficit-to-GDP ratios in Europe. While many European countries are currently experiencing fiscal challenges, given the uncertain geopolitical situation, maintaining extremely high borrowing needs year after year could be very risky.

The government currently has little opportunity or prospects to increase state revenue, while expenditures are rising. This is not solely due to the very high defense spending, which has been set at 5% CBAPoland also has one of the highest levels of social spending in Europe. Moody's also points to political obstacles in the form of a stalemate between the president and the government, which has a relatively effective veto over fiscal consolidation measures. Such paralysis could hinder any implementation of deficit-reduction measures.

Polish debt does not react in panic

Of course, it should be remembered that economic growth in Poland is one of the strongest in the whole of Europe and as long as there are no obstacles to growth, the excessive deficit will not be a problem for investors either. Investors are key to attracting new debt in Poland. Polish debt isn't panicking about the agency's decision, as was the case with Fitch two weeks ago.As Bloomberg data shows, yields on 10-year bonds are rising by just 1-2 basis points at the opening on Monday, reaching 5,13%.

A similar lack of reaction is evident in the foreign exchange market, with changes against major currencies amounting to only a few hundredths of a percent. Before the opening of the European market, we even observed the strengthening of the Polish zloty against the euroIt is worth noting, however, that in the case of 10-year yields and the EUR/PLN pair, we have been in a very narrow consolidation since April.

Today at 10:00 AM, we'll have retail sales data for Poland, and in the afternoon we'll hear further comments from US central bankers. However, after the first 20 minutes of trading in Europe, the dollar is trading at PLN 3,6308, the euro at PLN 4,2650, the pound at PLN 4,8921, and the franc at PLN 4,5654.

Source: Michał Stajniak, CFA, XTB