Fitch Ratings has assigned the Republic of Poland's EUR2bn Eurobond an 'A-' (A minus) rating. The bond, issued under the Republic of Poland's euro medium-term note programme (EMTN), matures on 20 June 2028. The rating is in line with Poland's 'A-' (A minus) Long-term foreign currency Issuer Default rating (IDR), which has a Stable Outlook.

"Poland's creditworthiness is supported by the country's strong underlying institutional and democratic framework, diverse and strongly performing economy, and improved budget performance," says David Heslam, Director in Fitch's Sovereign team. Real GDP growth has averaged over 5% per year since 2003. Strong GDP and employment growth have contributed to an improvement in public finances. The government deficit narrowed to 2% of GDP in 2007, its lowest level in over a decade, from 3.8% in 2006. General government debt fell to 45% of GDP at end-2007, from 48% a year earlier.

The pace of economic growth has led to some early signs of macroeconomic imbalances and brought some of Poland's structural constraints to the fore, particularly those related to the labour market. Annual average inflation stood at 4.4% in May 2008, compared with the National Bank of Poland's (NBP) inflation target of 2.5% (plus or minus one percentage point).

Poland's freely floating exchange rate and the strong record of the independent monetary policy board of NBP increases confidence that inflation will be brought back towards target over the next two years. Meanwhile, strong domestic demand and weakening growth in Poland's main trading partners will lead to a widening of the current account deficit, with Fitch forecasting deficits of 4.6% of GDP in 2008 and 5.5% in 2009 (2007: 3.8%). Strong FDI inflows and growing inward EU transfers should, however, keep the current account deficit well financed.

The Civic Platform (PO)-led government has ambitious plans to reform Poland's social security system, reduce the size of the public sector and accelerate the privatisation programme. If successful, these plans would help to finance legislated tax cuts in 2009 and further planned cuts in 2010-11, improve the flexibility of public finances and set the government debt ratio on a solid downward trend, which would be positive for sovereign creditworthiness.

Bringing inflation back towards target would improve the prospects for Poland adopting the euro in 2012, which could become a key rating driver in the next year or two. However, with the government facing a hostile President and the need to keep the junior coalition partner, the Polish People's Party (PSL), on board, considerable uncertainty surrounds the likely success of the PO fulfilling its policy agenda.