Poland’s path to narrowing its fiscal deficit, maintaining its credit ratings and keeping investors on board looks more difficult following conservative nationalist Karol Nawrocki’s presidential election triumph.
Nawrocki’s victory in Sunday’s election could deal a blow to the centrist government’s efforts to cement the EU and NATO member state’s pro-European orientation.
Poland faces big spending demands, including a rise in defense outlays after Russia’s invasion of Ukraine, and is grappling with the EU’s second-highest fiscal deficit, driven in part by what are widely seen as generous social policies.
Polish Prime Minister Donald Tusk, who returned to power in 2023, has struggled to fulfil electoral promises that could strain public finances and the outgoing president, Andrzej Duda, has used his presidential veto powers to block some of Tusk’s political agenda.
Nawrocki, who like Duda is aligned with the opposition, could employ similar tactics, possibly delaying reforms and increasing the government’s reliance on fiscal measures in the run-up to a 2027 national election.
“The Nawrocki presidency will fuel domestic political instability. Tusk’s reform agenda will be paralyzed,” Eurasia group analyst Orsolya Raczova said, adding that Nawrocki could “actively stoke tension among coalition partners.”
S&P Global said that, at a minimum, Tusk could during Nawrocki’s presidency expect similarly “uneasy relations” between the president and the government, and that Poland’s economic strength and medium-term fiscal policies would remain the most important factors for Poland’s credit rating.
Tusk on Monday announced that he would call for a parliamentary vote of confidence in his coalition government soon. The Polish parliament’s lower house speaker, Szymon Holownia, said he had proposed that the vote take place at an additional sitting of the Sejm on Tuesday next week.
Poland has pledged to bring its budget deficit below 3 percent of GDP by 2028, but, given the high-stakes election calendar, Tusk’s government has ramped up borrowing to record levels ahead of the presidential ballot.
Polish stocks extended losses for a second day on Tuesday, slipping further away from their recent near 14-year-highs, underperforming central European peers. Poland’s international bonds also came under some pressure.
Hasnain Malik, managing director with Tellimer, said the result was a “jolt” to investors. Before Monday, the zloty had been up 11 percent versus the US dollar this year and the local equity index had been up 40 percent in total US dollar return terms.
The IMF in April projected that Poland’s economy would grow 3.2 percent this year and 3.1 percent next year, before slowing to 2.7 percent by 2030.
However, the European Commission last month forecast that the deficit would be more than 6 percent of GDP this year and next, nearly double the average for the 27-member EU and the bloc’s second-highest behind Romania.
The yield on Poland’s 10-year domestic government bond — a key benchmark for borrowing costs — is currently at about 5.5 percent — below the 6 percent mark it hovered around for much of the first three months of the year.
“Poland is likely to face continued political polarization in the coming years, with the next general elections scheduled for 2027, potentially increasing reliance on expansionary fiscal policies and delaying fiscal consolidation,” Scope Ratings said.
S&P last week warned that while it was “not in a rush” to adjust Poland’s A- credit rating, the deep polarization in Polish politics made lowering deficits potentially risky.
Poland has a narrow window before the next election to craft a medium-term fiscal adjustment. Some economic analysts say its ability to do so now looks more uncertain.
“It is likely to be increasingly more challenging to implement fiscal tightening measures after the loss by the ruling coalition in the presidential election,” Barclays economist Ercan Erguzel wrote in a note.
One of Tusk’s main unfulfilled electoral promises is a doubling of the income tax-free threshold, with an estimated price tag of some 55 billion zloty (US$14.66 billion), coming on top of social benefits already widely viewed as generous.
Aleks Szczerbiak, politics professor at the University of Sussex, said Tusk’s government was hostage to its income tax pledge, with cost-of-living issues still weighing on Poles despite inflation retreating.
“If they get to the next election, and there’s no road map and they haven’t started implementing it, that tax-free allowance thing is very, very difficult,” he said, adding that the political demand was directly at odds with the economic imperative. “And I’m not quite sure how they’re going to square that circle.”
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