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Poland’s constitutional crisis could scare investors

Rating agencies have not taken kindly to the policies of Poland’s new government. The latest broadside comes from ratings agency Moody’s, which has just warned that Poland’s constitutional crisis is credit negative.

In March, the ruling Law and Justice Party (PiS) party tried to overhaul the country’s top court, the latest in a series of measures that critics say risk compromising democratic processes. The top court rejected the reforms, declaring them illegal.

Moody’s warns this will dent foreign investor confidence:

Poland (A2 stable) is facing heightened political risk as a result of its constitutional crisis. These developments may impair Poland’s attractiveness for foreign investors, a credit negative.

Poland relies to a significant extent on foreign investment, particularly on inward portfolio flows: in 2015, external debt was at 68.9% of GDP and at 129.3% of current account receipts, and Moody’s External Vulnerability Indicator – the ratio of maturing external obligations to foreign currency reserves – was at 100%, indicating a significant susceptibility to a loss of external investors’ confidence.

Net portfolio inflows have progressively declined in recent months and posted a negative reading at the beginning of 2016. In January, Poland registered a net portfolio outflow of $3.1 billion. The January 2016 outflow is the second largest reading in the last 10 years, ranking second only to the outflow registered in October 2008 after the Lehman collapse.

This latest warning comes after S&P slapped Poland with its first ever downgrade in January, and after ratings agencies cast a wary eye over government plans for the banking sector, including lofty charges to resolve issues over foreign-currency mortgages.

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