CEE Macro Weekly: Fiscal consolidation key to Poland’s rating

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TOP MACRO THEME(S):

• Will the drought put Hungary’s rate cuts on hold? (p.3) – At its August meeting, the MNB cut its key interest rate by 25bp to 5.50%. This was the third consecutive cut and the fourth this year. The easing cycle may now pause, but rate cuts could resume in 2027, on a scale similar to this year.

WHAT ELSE CAUGHT OUR EYE:

• POL: The government has approved the 2027 draft budget. The Ministry of Finance expects the general government deficit to reach 7.1% of GDP in 2026 and to remain at the same level in 2027. Once again, these forecasts point to a deeper deficit than previously expected by the Ministry of Finance (6.8% of GDP) and are also deeper than our previous forecasts (7.1% of GDP in 2026 and 6.7% of GDP in 2027). The central government budget deficit alone is expected to amount to PLN 282.6bn in 2027, compared with the PLN 271.7bn limit for 2026. The government does not expect the statutory or constitutional debt-to-GDP thresholds to be breached in 2027. The macroeconomic assumptions underlying the forecasts do not differ materially from our forecasts or the market consensus. The fiscal outlook remains a key domestic risk for long-term government bonds, reinforcing concerns over the lack of credible consolidation ahead of the elections.
• POL: Fitch affirmed Poland’s long-term foreign-currency rating at “A−” with a negative outlook, in line with expectations. According to the agency, the rating is supported by a diversified and resilient economy, EU membership, a track record of credible monetary and exchange–rate policies, and a robust external position relative to similarly rated peers. These strengths are offset by a high fiscal deficit, rapidly rising public debt, and lower income levels and governance indicators compared with peers. The negative outlook reflects the lack of a credible fiscal consolidation plan, political challenges and the risk of pre - election fiscal easing, which have weakened the agency’s confidence in the government’s ability to implement consolidation and reduce the deficit. According to Fitch, the rating could be downgraded due to: (1) on the fiscal side, a failure to reduce the deficit, pre - election fiscal easing, or a significant increase in financing costs; and (2) on the macroeconomic side, a material deterioration in medium-term GDP growth prospects. Fitch also indicated that the outlook could be revised back to stable if public debt growth slows. According to the agency, the effectiveness of economic policymaking is constrained by a general lack of cooperation and antagonistic relations between the government and the President, including the President’s use of legislative vetoes. Fitch expects the fiscal deficit to decline only slightly, from 7.3% of GDP in 2025 to 6.9% in 2026 – more than twice the current peer median – and to 6.7% of GDP in 2027, compared with 6.2% expected previously. The agency projects public debt to rise to 72.7% of GDP in 2028 from 59.7% in 2025. In our view, a Fitch rating downgrade cannot be ruled out at subsequent reviews if fiscal consolidation fails to materialise.

THE WEEK AHEAD:

• Next week, the focus will be on preliminary August inflation data from Poland (Monday, PKOe: 3.2% y/y) and Czechia (Friday, PKOe: 1.9% y/y). We will also see detailed estimates of 2q26 GDP growth in Poland (Monday) and Hungary (Tuesday).