Poland: Minority PiS Government Restricts Capacity for Reform, Raises Early Election Risk

We expect Poland to help lead the economic recovery in central and eastern Europe this year. Polish output should grow 5.6% in 2021 – revised up from a 4.9% forecast Scope Ratings held as of June – before 4.6% growth next year, having reached pre-crisis output levels by Q2 2021.

However, the governing Law and Justice (PiS) party’s loss of one of its junior coalition partners represents, nevertheless, an increase in policy and economic uncertainty, not least by raising likelihood of early elections before the autumn 2023 deadline.

Institutional erosion has increased political instability and tested Poland’s institutional relationships

PiS’s loss of its slim majority in the lower house (Sejm) shows the consequences of institutional erosion since PiS entered government in 2015 – a factor that has weighed on Poland’s A+ sovereign credit ratings. The recent bill introduced in Parliament seeking to bar companies outside the European Economic Area from holding majority stakes in Polish media firms has brought government instability after the coalition partner’s exit while potentially further testing Poland’s institutional relationship with the EU and the United States.

The bill under question is seen as a manner to compel US media group Discovery to sell a controlling stake in TVN, Poland’s main independent broadcaster, which has been critical of the government. At this stage, it remains unclear whether the bill will be signed into law.

A silver lining to Law and Justice losing its governing majority

There’s a silver lining, however, to PiS’s loss of its governing majority, which, while making the passage of important reforms such as those required for critical EU funding more difficult, may also bring a more balanced near-term legislative agenda, reducing the risk of further weakening of judicial independence and the free media. The government may temper certain policy objectives in return for support of smaller parliamentary groupings and independent MPs to pass legislation.

Over recent weeks, the government has passed a bill reducing the room for property restitution claims and was forced by the European Court of Justice into an about-face over a disciplinary chamber for Supreme Court judges. Since PiS entered government, other actions that have buffeted democratic norms include politicisation of the Constitutional Tribunal, attempted removal of Supreme Court judges, and limitations of media freedoms.

Checks and balances prevail restraining pace of institutional weakening

Checks and balances restricting pace of institutional backsliding still hold, including the government’s lack of a Sejm majority at this stage and opposition control of the Senate. More importantly, Poland’s dependence on EUR 58.1bn in EU monies, equivalent to more than 10% of 2021 GDP as part of the Recovery and Resilience Facility, alongside on further 2021-27 EU multiannual budget financing, constrain the government’s room for manoeuvre.

Dependence on EU funds encourages PiS observation of ECJ rulings and EU decisions on the rule of law ultimately, after frequently a phase of acrimonious back and forth talks.

A minority government may be difficult to sustain

Looking ahead, the PiS party will be eager to put off elections for as long as possible, although a current minority government may be difficult to sustain. Should PiS lose a parliamentary vote of confidence, an early election scenario could raise possibility of a hung parliament and associated heightened political uncertainty, but, moreover, might bring change of government favouring centrist groups.

Delays of fiscal consolidation and impediments to economic programme

This aside, the minority PiS government may seek to delay stringent fiscal consolidation reform over the coming period, with looser spending policies driven by political considerations. A recent outsized 60% pay hike for legislators – which goes into effect on 1 September – is only one example of how this may look. The lack of a governing majority may, moreover, impede the government’s capacity to fully implement its economic programme – even the flagship Polish New Deal in the existing form.

For a look at all of today’s economic events, check out our economic calendar.

Dennis Shen is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Levon Kameryan, Senior Analyst at Scope Ratings, contributed to writing this commentary.