Poland's Fiscal Deterioration and Political Deadlock: Implications for Sovereign Credit Risk and Investor Strategy

Poland’s economic trajectory in 2025 is marked by a troubling confluence of fiscal deterioration and political instability, raising critical questions for sovereign credit risk and long-term investment strategies. While the country’s real GDP growth is projected to reach 3.3% in 2025, driven by private consumption and EU-funded infrastructure projects [1], the fiscal landscape tells a different story. The general government deficit widened to 6.6% of GDP in 2024, exceeding initial forecasts, and is expected to remain elevated at 6.4% in 2025 [1]. This trajectory, compounded by political gridlock, has triggered warnings from credit rating agencies and forced investors to reassess risk exposure.

Fiscal Deterioration: Structural Pressures and Limited Consolidation

The 2024 fiscal shortfall was driven by weaker-than-expected tax revenues, surging public consumption, and a sharp increase in defense spending. Defense expenditures, now accounting for 4.7% of GDP in 2025 [3], reflect Poland’s strategic alignment with NATO and EU security priorities but have strained budget flexibility. Meanwhile, social benefits and healthcare costs remain entrenched, consuming a significant share of public expenditure.

The government’s fiscal consolidation plan—relying on excise duty hikes and non-indexation of personal income tax brackets—has been criticized as insufficient to offset these pressures [1]. While public investment is projected to exceed 5% of GDP in 2025, driven by military equipment deliveries and EU-funded projects, this spending is largely pre-committed and offers limited scope for adjustment [1]. As a result, Poland’s public debt is expected to cross the 60% of GDP threshold by 2026, breaching the EU’s fiscal stability framework and triggering automatic austerity measures [4].

Political Deadlock: A Threat to Fiscal Governance

The 2025 presidential election, in which right-wing candidate Karol Nawrocki narrowly defeated liberal challenger Rafał Trzaskowski, has exacerbated institutional gridlock. Nawrocki’s victory has created a divided executive, with the pro-EU Tusk government and the president’s opposition-aligned coalition clashing over key policies. This divide has stalled critical reforms, including updates to Poland’s national security strategy and judicial independence measures [1].

The political stalemate has also undermined fiscal governance. With Nawrocki leveraging veto powers to block social and judicial reforms, the Tusk administration faces challenges in maintaining its fragile coalition. Internal disagreements over tax thresholds and defense spending further complicate consolidation efforts [3]. Credit rating agency Fitch has explicitly linked Poland’s “substantial fiscal slippage” to political instability, citing the lack of a credible consolidation strategy as a key risk [2].

Credit Risk and Investor Implications

The fiscal and political risks have already triggered a downgrade in Poland’s credit outlook. Fitch cut its outlook to negative in June 2025, warning that deficits will average 6.7% of GDP through 2025–2026 [2]. While Scope affirmed Poland’s A rating with a stable outlook, it highlighted elevated fiscal deficits and political polarization as threats to governance effectiveness [2]. Morningstar DBRS echoed these concerns, noting that the fiscal deficit will remain above 6% of GDP in 2025 [3].

For investors, the implications are twofold. First, Poland’s public debt trajectory—projected to breach the 60% of GDP threshold by 2026—increases vulnerability to interest rate shocks and debt servicing costs. Second, the political uncertainty raises the risk of abrupt policy shifts, such as tax cuts or spending increases, which could further strain fiscal sustainability. The Polish Central Bank has already signaled caution on rate cuts, citing concerns over fiscal sustainability and delayed EU fund absorption [5].

Strategic Considerations for Investors

Given these risks, investors must adopt a nuanced approach to Poland’s market. While the country’s economic fundamentals—supported by EU integration and strong domestic demand—remain resilient, the fiscal and political headwinds warrant caution. Key strategies include:
1. Diversification: Reducing exposure to Polish sovereign debt and overleveraged sectors, such as defense and public infrastructure.
2. Hedging: Utilizing currency and interest rate derivatives to mitigate risks from potential fiscal shocks or credit downgrades.
3. Monitoring Political Developments: Closely tracking the Tusk-Nawrocki power struggle and its impact on fiscal policy, particularly ahead of the 2027 parliamentary elections.

In conclusion, Poland’s fiscal deterioration and political deadlock present a high-stakes scenario for sovereign credit risk. While the economy’s growth potential remains intact, the interplay of rising deficits, institutional gridlock, and external pressures demands a recalibration of investment strategies. Investors who prioritize flexibility and risk mitigation will be better positioned to navigate the uncertainties ahead.

Source:
[1] Economic forecast for Poland - Economy and Finance [https://economy-finance.ec.europa.eu/economic-surveillance-eu-economies/poland/economic-forecast-poland_en]
[2] Fitch Cuts Poland Credit Outlook And Warns of Fiscal Risks [https://www.bloomberg.com/news/articles/2025-09-05/fitch-cuts-poland-credit-outlook-and-warns-of-fiscal-risks]
[3] Poland: Country File, Economic Risk Analysis [https://www.coface.us/news-economy-and-business-insights/economic-risk-dashboard2/country-risk-files/poland]
[4] Poland: Towards a recovery in investment [https://economic-research.bnpparibas.com/html/en-US/Poland-Towards-recovery-investment-2/11/2025,51315]
[5] Polish Central Bankers Are More Cautious After Nationalist Win [https://www.bloomberg.com/news/articles/2025-06-06/poland-s-kotecki-says-mpc-is-turning-cautious-on-further-easing]