CEE Macro Weekly: Defence spending justified despite fiscal challenges

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TOP MACRO THEME(S):

• Bridging employment gaps (p. 3) – Gender employment gap in the CEE continues to exceed the EU average, while Czechia recorded a noticeable decline amid increase in part-time work participation.

WHAT ELSE CAUGHT OUR EYE:

• POL: During the night from Tuesday to Wednesday, multiple Russian drones violated Polish airspace. Some were shot down by the military. Prime Minister D. Tusk reported 19 incursions, noting that for the first time the drones had entered from the direction of Belarus. He formally requested the invocation of NATO’s Article 4, which was accepted, triggering consultations among the Alliance member states took. Market reaction to these developments was limited.
• POL: As expected, the Fitch rating agency has maintained Poland’s credit rating at A-, but downgraded its outlook from stable to negative. In its statement, Fitch indicated that the main factor leading to this change was the deterioration of the current situation and outlook for the public finance sector. According to Fitch’s forecasts, Poland’s deficit-to-GDP ratio, public debt-to-GDP ratio, and interest costs-to-revenue ratio will remain well above the peer group median. The agency raised its forecast for the general government deficit to 6.9% of GDP in 2025, 6.8% in 2026, and 6.3% in 2027 (vs. the median of 2.9% for peer countries). The revision reflects a higher-than-previously-assumed starting deficit level (6.6% of GDP in 2024) as well as the expected further increase in public investment and defense spending, in the face of limited capacity to raise tax revenues. Deeper deficits will lead to a faster accumulation of public debt, which, according to Fitch, will amount to 59.3% of GDP this year and reach 68.3% of GDP in 2027 (vs. the peer group median of 53.7% of GDP). As a consequence of high borrowing needs, the agency expects a further deterioration in the ratio of interest payments to budget revenues - to 7.2% in 2027 from 5.1% in 2024 (vs. 4.3% for peer countries). Fitch continues to emphasize that, outside the area of public finances, Poland’s macroeconomic fundamentals remain strong.
• POL: The European Commission announced that Poland will receive EUR 43.7 bn from the SAFE program. The SAFE preferential loan program (Support Instrument for Fostering European Security) was established during the Polish presidency of the EU Council. It is part of a plan to rearm Europe in connection, among other things, with Russia’s expansion of its military capabilities. Under SAFE, urgent and large-scale investments in the European technological and industrial base of the defense sector are to be financed. Poland is the main beneficiary of the program within the available pool of EUR 150 bn.
• ROM: All four motions of no confidence towards the cabinet of I.Bolojan failed. Motions were filed by the opposition because the government submitted to parliament a package of laws aimed at restoring public finances under a procedure that prevented debates, while the opposition attempted to reject 4 of those laws.

THE WEEK AHEAD:

• Next week will focus on monthly indicators from Poland. On Friday, Moody’s rating decision regarding Poland will be crucial – an outlook downgrade appears highly likely, following Fitch’s earlier move, while a rating cut (from A2, highest among top 3) cannot be ruled out.