PolandPolandafter the EU Accessionafter the EU Accession

26 November, 200426 November, 2004

Mats OlaussonMats Olausson

Chief StrategistChief Strategist Emerging MarketsEmerging Markets mats.olausson@seb.semats.olausson@seb.se

+46-8 506 232 62 +46-8 506 232 62

2

May 1, champagne, and what?

What’s new since 1 May Customs procedures Trade barriers Direct payments to farmers Psychology

Exports Further trade integration

Investments Sentiment, real interest rate, output gap, EU-funds

Growth Higher, broader

Inflation EU harmonisation, food, oil, weak exchange rate 2003. Risk of second round effects

”The race for the euro” 3 countries in ERM 2. Public finances the stumbling block. SGP changes?

3

Poland: Past the peak

Exceeding expectations Broadening growth But unemployment remains high Net exports turn negative in 2005 Investments take over, but remain

disappointing despite high capacity utilisation rising profits lower corporate income tax

GDP growth slows from 5.6% this year to 4.7% and 4.3% next two years

Still, that is above potential growth

Year-on-year percentage changePoland: GDP, fixed investments and consumption

GDP (RHS) Fixed investments (LHS)

Private consumption (LHS)

Source: EcoWin

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q198 99 00 01 02 03 04

0

1

2

3

4

5

6

7

-15

-10

-5

0

5

10

15

20

4

Poland: Structural problems

Negative public savings crowd out private investment

Employment ratio (only 51% compared to 64% in EU)

Bureaucracy, corruption Labour market inflexibility Agricultural sector Infrastructure Ownership

GDP growth and unemployment

Source: EcoWin

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q199 00 01 02 03 04

GD

P g

row

th, q

uarterly, %

ch. yo

y

0

1

2

3

4

5

6

7

Un

emp

loym

ent, %

11

12

13

14

15

16

17

18

19

20

21

GDP

Unemployment

5

Poland: Public finances are weak

2004 deficit will come in below target. But the target was set very high despite high growth and CPI

More ambitious fiscal target 2005 Eurostat rules against Poland

Deficit will be revised up by 1.5-2% Debt/GDP up by 3-4%

Debt/GDP is on a rising trend Maastricht is still far away Changes to SGP? Burden to tighten falls on next

government20062005200420032002200120001999

60

55

50

45

40

35

7

6

5

4

3

2

1

Sources: Eurostat, Ministry of Finance, SEB

Poland: Public finances, EU definition*Per cent of GDP Budget deficitDebt

SEB forecast

* Excluding transfers to private pension funds.

Public sector debt (LHS)Budget deficit (RHS)

6

Poland: Temporary rise in inflation

CPI above target (1.5-3.5%) Food, oil and hiked regulated prices ahead of EU-

accession. One-offs More hawkish central bank has hiked by 125bps to 6.5% Core inflation remains around 2.5% CPI to rise in 1Q but ease back in 2Q towards the upper

end of the band Stronger zloty helps One more hike during 1Q Neutral real interest rate 4%

Inflation and interest rates

Source: EcoWin

01 02 03 04-4

0

4

8

12

16

20

Percen

t

-4

0

4

8

12

16

20

5y yield

CPI

Core inflation

Policy rate

Food

7

Poland: Strong zloty

Undervalued vs. PPS Lower ULC REER lags neighbours Stronger current account Supporting portfolio flow Lower political risk premium Tighter monetary policy Neg. seasonals in Feb-Mar Focus shifting from PLN vs. basket

and USD to EUR/PLN We expect the zloty to strengthen

further to 4.10

Basic balance and exchange rate

Source: EcoWin

01 02 03 04

Real effective exchange rate100

105

110

115

120

125

130

Basic balance (12m

th) US

D bn -1

1

3

5

7

9

11Real effective exchange rate

Basic balance

Real Effective Exchange Rates

Source: EcoWin

98 99 00 01 02 03 048590

95100

105110

115120

125

8590

95100

105110

115120

125

PLN

CZKHUF

SKK