11 March 2003

Poland: Nominal and real convergence to the EMU

Arkadiusz Krześniak

tel. +(48 22) 579 9105

Section 1

External Environment

3

Global recovery expected in 2004

GDP and inflation forecasts of the Deutsche BankNo inflation pressures in 2003 .

GDP growth Inflation

2001 2002F 2003F 2004F 2001 2002 2003F 2004F

Euroland 1.4 0.7 1.2 2.7 2.5 2.2 1.8 1.7Germany 0.6 0.2 0.6 3.0 2.4 1.3 1.0 1.0France 1.8 0.9 1.2 2.6 1.8 1.9 1.7 1.4Italy 1.8 0.4 1.1 2.4 2.3 2.6 2.4 2.1

UK 2.0 1.6 2.5 3.0 2.1 2.2 2.5 2.4

US 0.3 2.3 2.8 3.8 2.8 1.6 1.6 1.9

Japan -0.2 -0.2 0.2 0.9 -0.7 -0.9 -0.6 -0.5

Russia 5.0 4.2 3.7 3.6 18.6 15.1 12.0 10.3

Poland 1.0 1.3 2.6 4.0 3.6 0.8 1.5 2.3

Section 2

Determinants of Poland’s economic performance

5

Real interest rates in Poland declined but are still high...

Real interest rates in Poland, Germany and USAHigh interest rate differential is the

main determinant of the macro-

economic situation of Poland

(besides relatively lax fiscal policy)

-2

0

2

4

6

8

10

12

14

1/31/96 9/30/96 5/31/97 1/31/98 9/30/98 5/31/99 1/31/00 9/30/00 5/31/01 1/31/02

Poland Germany USA

6

Interest rate differential does not impact the USD/PLN much

PLN

7

Interest rate differential has some impact on the EUR/PLN

PLN

8

PLN to firm on structural factors, reduced uncertainty, successful EU referendum, and interest rate differential

PLN

-4%

1%

6%

11%

16%

4/11/00 8/4/00 11/24/00 3/19/01 7/12/01 10/31/01 2/25/02 6/19/02 10/8/02 1/31/03

PLN deviation from parity (reversed)

9

East European currencies tend to appreciate in long-term due to productivity gains (Samuelson-Balassa effect)

10

PLN will be additionally firmed by transfers from the EU in the 2004-2006.

Industrial production and GDP

-20000

-15000

-10000

-5000

0

5000

10000

15000

2000 2001 2002 2003F 2004F 2005F 2006F

USD m

Unclassifiedflows

Transfers

Net transfers fromEU

Income

Services balance

Trade balance

Current Account

Section 3

Nominal convergence

12

Interest rate differentials will be declining at a slow pace in 2003-2004

PLN

13

Policy interest rate in Poland is coverging to that of euro-zone

PLN

14

Inflation in Poland is lower than in Germany!

Polish and German inflation

15

And is still falling...

Polish and German inflation

16

Why did Polish CPI decline by over 1000 bp in 2 years?

Determinants of inflation

-15

-10

-5

0

5

10

15

199901

199905

199909

200001

200005

200009

200101

200105

200109

200201

200205

200209

%

10

15

20

25

30

35

USD/b

CPI YoY (lhs)

Food and non-alcohol beverages prices YoY (lhs)

PLN index (Jan 1999=0, up means appreciation) (lhs)

Crude Oil (Brent) (rhs)

17

Why will it continue to be low?

Determinants of inflation

0

2

4

6

8

10

12

14

031999

081999

012000

062000

112000

042001

092001

022002

072002

%CPI Net inf lation E(CPI)

18

PLN yield curve is normalising but still has negative slope

Slopes of Polish and German yield curves

19

Real effective exchange rate in Poland is appreciating

Real Effective Exchange Rates

20

Full convergence has not yet taken place in Poland.

Slopes of Polish and German yield curves

Section 4

Real convergence

22

Business cycles in Poland and Germany are well correlated.

Slopes of Polish and German yield curves

23

Labour productivity growth in Poland is higher than in Germany

Slopes of Polish and German yield curves

24

But unemployment rate is much higher...

Slopes of Polish and German yield curves

25

Unpleasant unemployment arithmetic(unemployment growth = change in productivity – GDP growth)

Slopes of Polish and German yield curves

26

Poland and UE – real convergence (1)

-1

0

1

2

3

4

5

6

7

8

9

31/03/199530/06/199630/09/199731/12/199831/03/200030/06/2001

YoY% German GDP YoY Polish GDP YoY

27

Poland and UE – real convergence (2)

0

5000

10000

15000

20000

25000

30000

Ger

man

y

Spa

in

Fin

land

Fra

nce

Gre

ece

Irel

and

Net

herla

nds

Sw

eden

Uni

ted

Kin

gdom

Cze

ch R

epub

lic

Pol

and

Ave

rage

DI PPCS DI Euro GDP PPS GDP Euro

Personal disposable income (DI) and GDP per capita – nominal and real

28

Maastricht criteria

29

Poland – exchange rate and interest rate forecasts

EUR/PLN USD/PLN CHF/PLN GBP/PLN EUR/USDWIBOR

3MEURIBOR

3MLIBOR

USD 3MCPI

(Poland)(end of period)

Mar-03 4.251 3.900 2.889 6.182 1.090 6.00 2.30 1.30 0.3Apr-03 4.240 3.890 2.881 6.166 1.090 6.00 2.30 1.30 0.2May-03 4.238 3.870 2.888 6.146 1.095 5.75 2.30 1.25 0.5Jun-03 4.202 3.820 2.872 6.074 1.100 5.70 2.30 1.25 1.0Jul-03 4.199 3.800 2.868 6.042 1.105 5.50 2.30 1.25 1.2Aug-03 4.185 3.770 2.856 5.994 1.110 5.50 2.30 1.75 1.3Sep-03 4.159 3.700 2.803 5.883 1.124 5.50 2.30 1.75 1.2Oct-03 4.086 3.600 2.738 5.760 1.135 5.50 2.30 2.25 1.1Nov-03 3.990 3.500 2.672 5.635 1.140 5.20 2.60 2.25 1.5Dec-03 3.950 3.450 2.654 5.589 1.145 5.20 2.60 2.25 1.5Jan-04 3.933 3.420 2.631 5.575 1.150 5.20 2.60 2.50 1.6Feb-04 3.922 3.410 2.623 5.575 1.150 5.00 2.60 2.50 1.7Mar-04 3.910 3.400 2.615 5.576 1.150 5.00 2.60 2.50 1.8