Poland – macroeconomic situation

Brusseles, September 2013 Jarosław Antonik, Tomasz Kowalski KBC TFI S.A.

KBC Autumn Economic Seminar

2

GDP

Poland went smoothly trough the first phase of the global/European economic slowdown but then …

Consumption – „0” contribution to GDP growth recently (deteriorating situation on labour market, postponed private consumption).

Investments – dragging on, Euro 2012 hangover, public finance tensions.

Counter cyclical character of net export, driven by import – weakness of domestic consumption.

0,8

-6

-4

-2

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4

6

8

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12

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2005 2006 2007 2008 2009 2010 2011 2012 2013

Individual final consumption expenditure Public final consumption expenditure Gross fixed capital formation Changes in inventories Net exports GDP

GDP by expenditure Contribution %, YoY

Source: Central Statistical Office

2012 UEFA European Football Championship

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Labour market and retail sales

Expected labour market improvement at lower GDP growth rates – demographics, efficiency improvement, declining potential GDP growth rate.

Postponed durable goods spending.

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13,1

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Employement in enterprise sector (%, YoY) Unemployment rate (%)

Employment and unemployment Employment %, YoY; Unemployment rate %

3,5 4,3

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Gross monthly wages in manufacturing (%, YoY) Retail sales (%, YoY)

Wages and retail sales Gross monthly wages in manufacturing %, YoY; Retail sale %, YoY

Source: Central Statistical Office

4

Current account

Positive trade balance – weak domestic demand – import, favourable FX rate for exporters, increasing economic openness (export share in GDP 49% in 2013 vs. 39% in 2009 and 45% in 2011).

Strong current account data likely to support PLN.

In case of rapid PLN drop CB intervention possible – precedence intervention 7th of Jun, NBP’s comment: ”action as an attempt to prevent excessive currency moves”.

Current account and trade balance bn EUR

-8

-7

-6

-5

-4

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-2

-1

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2005 2006 2007 2008 2009 2010 2011 2012 2013

Current account balance Trade balance

Source: NBP (National Bank of Poland)

0

1

2

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2005 2006 2007 2008 2009 2010 2011 2012 2013

EUR/PLN USD/PLN

PLN exchange rates Quarterly averages

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PMI

PMI Manufacturing at 52.6 pointing out for economic expansion

30

35

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45

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55

60

65

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

PMI Manufacturing (52,6)

PMI New Export Orders (54,8)

Source: Thomson Reuters

PMI PMI Manufacturing, PMI New Export Orders

6

EU money

New UE budget for 2014-2020, Poland will receive EUR 105.8bn (EUR 4.5bn more vs. years 2007-13), including EUR 73bn EU of cohesion funds or around PLN 44bn a year (c.a. 3% of GDP) vs. EUR 67bn in 2007-13.

2013 and 2014 sound recovery – w/o EU funds support.

EU money impact on GDP growth in Poland GDP %; EU money impact on GDP growth %

Source: Central Statistical Office, Instytut Badań Strukturalnych

KBC forecasts

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Inflation

Lack of inflation pressure due to weak labour market situation, positive impact of regulated prices (electricity, gas tariffs).

Negative output gap to 2015 – Central Bank forecasts.

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CPI (%, YoY) Core CPI (%, YoY) Reference rate

Inflation and interest rates CPI, Core CPI, Reference rate

Source: Central Statistical Office, NBP (National Bank of Poland)

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Summary of our forecasts vs. consensus

KBC forecasts

Source: Bloomberg, KBC TFI S.A., other mentioned sources

BB annual consensus forecasts

BB quarterly consensus forecasts

2013 2014 GDP 1.1 2.2 CPI 0.9 1.8 10Y GOVERNMENT BONDS YIELD (EOP) 3.80 4.40

2013 2014 Data Bloomberg 1.3 2.5 Aug 13 European Commission 1.1 2.2 May 13 IMF 1.3 2.2 Apr 13 NBP (Central Bank) 1.1 2.4 Jul 13 Ministry of Finance 2.2 2.5 Oct 12 OECD 0.9 2.2 May 13 World Bank 1.5 Jan 13

Selected GDP forecasts

9

Central Bank forecasts

GDP Contribution, % YoY

Source: Polish Central Bank (NBP)

50% probability range:

CPI in 2013 0,6-1,1% (vs. March forecasts 1,3-1,9%), and 0,4-2,0% in 2014 r. (vs. 0,8-2,4%)

real GDP growth 0,5-1,7% in 2013 (vs. March forecast 0,6-2,0%), 1,2-3,5% in 2014 (vs. 1,4-3,7%).

CPI inflation % YoY

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Central Bank forecasts

Potential output Contribution, % YoY

Source: Polish Central Bank (NBP)

Output gap Contribution, % YoY

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Summary

Macroeconomic situation :

stronger consumption growth on the back of improving labour market situation – sustainable, and postponed durable goods spending – non sustainable,

fixed investments – recent data from large companies suggest some improvement is under way but we do not expect an increase in investment demand before 2014,

positive net export contribution will gradually decline as the recovery will progress,

lack of inflation preassure in the mid run.

Monetary policy

we expect interest rates to remain on hold at least until mid-2014 and we see a risk that the beginning of the tightening cycle could be delayed even further.

Other:

public finance: some fiscal discipline despite slowdown (fiscal balance: our forecast -4.5% vs. -3.5 planned), quasi nationalization of the pension funds assets (bonds’ part of the portfolio),

new EU budget for 2014-2020: Poland will receive EUR 105.8bn (EUR 4.5bn more vs. years 2007-13), including EUR 73bn EU of cohesion funds or around PLN 44bn a year (c.a. 3% of GDP) vs. EUR 67bn in 2007-13.

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Appendices

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PL bond market

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Yield curve 3M-10Y Monthly average yields 3M, 6M,1Y, 2Y, 3Y, 5Y, 10Y

Source: Thomson Reuters

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5Y 10Y

Bonds’ yields Daily 5Y, 10Y yields; %