The Economy of General Overview

Marek Rozkrut, Chief Economist Ernst & Young Poland

Sydney, May 6th, 2013 General information about the Polish economy

Poland – a general overview

► Population: 38.5 million

► Size: 312 685 km2

► Capital city:

► GDP 2012: 381.2 bn EUR (3% of EU GDP)

► GDP growth in 2012: 1.9%

► GDP per capita 2012: 9 900 EUR

► Currency: Polish Złoty (floating exchange rate regime)

► rate: 1.0% (Mar. 2013 / Mar. 2012) inflation target: 2.5% +/- 1 pp.

► NBP reference rate: 3.25%

► rate: 10.7% (Mar. 2013)

► The largest stock exchange in the CEE

► Selected memberships: NATO, EU, WTO, Schengen Agreement

Page 1 Polish production and exports structure

► Production structure of the Polish economy has been converging towards the structure of developed European economies. ► Machinery and transport equipment, manufactured goods, food, and chemicals account for nearly 80% of Polish exports.

Other Services Rental, Hiring Electricity, Gas, 6% and Real Water and 2011 GVA Poland Agriculture/For Exports structure by product (SITC), 2012 Estate estry/Fishing Waste 5% 5% Mining 4% Finance/ 3% 1% Food and live animals Insurance Information 10% 4% Media and 13% 2% Telecommuni- Beverages and tobacco Construction cations 5% 8% 4% Crude materials inedible, Education and except fuels Training 9% Mineral fuels, lubricants and 5% Manufacturing Wholesale & related materials 17% Retail Trade 19% Chemicals and related 38% products 21% Manufactured goods Professional, classified chiefly by material Scientific and Machinery and transport Technical Health Care equipment 5% Public Transport, and Social Administration Postal and assistance Miscellaneous manufactured and Safety Warehousing atricles 4% 5% 6% Source: .

Page 2 Polish trading partners and exports growth

► is the largest trading partner for Poland, accounting for more than ¼ of Polish exports. Polish exports-to-GDP ratio has doubled since the mid-90s and Polish producers have successfully increased their market share in foreign markets.

Exports, trade partners by share, 2012 Exports of goods and services (% of GDP)

Germany % of GDP 50 46.0 45 39.4 26.5% 40 37.5 29.4% 35 30 27.1 23.2 25

Netherlands 20 7.1% 2.7% 15 Australia 2.8% 0.3% 10 3.0% 6.6% 5 4.7% Slovakia 6.1% 0 5.1% 5.7% Australia

Other Source: Eurostat.

Page 3 Polish producers benefiting from improved labour cost competitiveness

► Increase in labour productivity significantly exceeded wage growth, translating into improved labour cost competitiveness of producers in Poland.

Real unit labour cost Labour cost competitiveness (1999 = 100) (Real effective exchange rate deflated by unit labour costs; 1999 = 100) 115 200

110 180 105 160 100 140 95 120 90

85 100

80 80

Czech Republic Australia area (17 countries) (27 countries) Slovakia Poland

Source: Eurostat, European Commission.

Page 4 Polish economy’s outstanding performance during the crisis

► The Polish economy has performed much better than other EU Member States throughout the crisis. Poland is the only EU country that avoided recession in 2009 as well as throughout the entire crisis period. Polish GDP cumulative growth in 2008-2012 amounted to 18.1%, which is by far the best result in the EU-27 and one of the best in the OECD.

The cumulative GDP growth in 2008-2012 25% 18.1% 20% 14.0% 15% 10% 5% 0% -5% -0.8% -10% -15% -20% -25%

Source: Eurostat, Australian Bureau of Statistics.

Page 5 Polish labour market performance

Outstanding economic performance reflected in the Polish labour market development. Despite economic slowdown, over the crisis years employment in Poland has increased by over 0.9 M. Among the EU Member States, only Germany has recorded a higher increase in the number of employees, but its population is twice as large as that in Poland. Over the same period employment in the EU has gone down by nearly 3 million.

Thou. Change in the number of employed (2008-2012) 2000 1 768 905 926 1000

0

-1000

-2000

-3000 -2 978 -4000

Source: AMECO.

Page 6 “The Green Island” phenomenon – explanation (1/2)

1 Strong private consumption ► Private consumption has proven to be largely crisis resistant. ► A relatively high share of basic goods (with a low income elasticity of demand) in private consumption. ► Consumption largely supported by a favourable labour market performance and a strong fiscal impulse. 2 Floating exchange rate ► Benefiting from a strong depreciation of the Polish złoty exchange rate. ► Weakening of the real effective exchange rate improved the price competitiveness of domestic producers, thus (1) supporting Polish exports and (2) favouring domestic production over imports. 3 Trade structure ► Higher share of consumer goods (more crisis resistant) and lower share of capital goods (less crisis resistant) in exports than in imports. ► As a result, during the economic slowdown net exports contribution to GDP growth tends to be positive. ► Moreover, Polish producers have managed to increase their share in the export markets – partly compensating for the weakness of external demand.

Page 7 “The Green Island” phenomenon – explanation (2/2)

4 Sound financial sector ► Not a single financial institution in Poland has been bailed out during the crisis nor required recapitalization with the use of public funds. ► The conservative financial supervision contributed to sound balance sheets, free of toxic assets. ► Polish banks are among the strongest in Central and Eastern , benefiting from strong capital ratios, good asset quality and Poland’s comparatively robust economic performance. ► As a result, share of consumers expressing their increased confidence in the banking industry is way above the EU average.

5 Fiscal impulse and EU funds ► Tax wedge reduction and childcare tax allowances. ► A strong increase in public investment, not least in infrastructure. In 2011 public investment in Poland reached a record high of 5.7% of GDP – the highest level in the EU. ► Public investment largely financed with the EU funds. Poland – the biggest beneficiary of EU funds both in the 2007-2013 and 2014-2020 EU financial perspective.

Page 8 Limited increase of public debt

Whereas an increase in general government deficit in Poland was similar to the EU average, an increase in the Polish public debt was much more moderate than in other Member States. An increase in the Polish public debt turns out to be even lower, if transfers to open pension funds are accounted for (financing future pension liabilities). Factors explaining a relatively low increase in public debt: the highest GDP growth in the EU (“growing out” of debt) and sound financial sector (no bailouts, no recapitalization of banks).

General government debt in the EU-27 and Australia, pp. Change of general government debt in the EU-27, % of GDP 2012 2008-2012

180 115 160 95 140 120 75 100 85.3 80 55 55.6 60 38.3 35 26.3 40 27.1 17.4 10.6 20 15 4.7

0

-5

27

27

-

-

Italy

Italy

Malta

Spain

Latvia

Malta

Spain

EU

Latvia

Ireland

Poland

EU

Austria France

Cyprus

Finland

Greece

Ireland

Estonia

Poland

Austria France

Cyprus

Finland

Greece

Sweden

Estonia

Belgium

Bulgaria

Portugal

Hungary

Slovakia

Slovenia

Sweden

Belgium

Bulgaria

Portugal

Romania

Hungary

Lithuania

Slovakia

Denmark

Slovenia

Germany

Australia*

Romania

Lithuania

Denmark

Germany

Australia*

Netherlands

Luxembourg

Netherlands

Luxembourg

Czech Republic Czech

United Kingdom United

Czech Republic Czech

United Kingdom United Poland Poland (without OFE) Source: Polish Ministry of Finance, AMECO, * IMF est. Poland (without OFE) Source: Polish Ministry of Finance, AMECO, * IMF est.

Page 9 Economic outlook

Euro area recession  economic slowdown has not been avoided in Poland. The trough is expected in 2013Q1/Q2, to be followed by a gradual economic rebound. GDP growth is forecasted to exceed 3% from 2015 onwards.

% Real GDP growth rate forecasts 8

7

6

5

4

3

2

1

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Historical Data MoF Forecast NBP Projection EC Forecast Global Insight Forecast IMF Projection IMF (FCL)

Page 10 Improvements during a downturn

Poland is the world’s top improver in the latest Doing Business 2013 Report. In the ease of doing business Poland ranks 55th, but since the last year it has achieved the highest progress of as many as 19 positions.

Index of Economic Freedom scores for the world, EU* Australia and Poland in 2007-2013 85 82.2 82.6 82.6 82.5 83.1 82.6 ► A continuous increase of 81.1 economic freedom in Poland, as 80 measured by the Heritage Foundation Index of Economic 75 Freedom. 69.4 70.0 69.9 69.8 69.8 69.6 69.1 70 ► Since the pre-crisis period the 66.0 64.1 64.2 Polish economic freedom index 65 63.2 overall score has increased the 60.1 60.3 60.3 most among all EU countries. 60 60.2 59.5 59.4 59.7 59.5 59.6 58.1 55 2007 2008 2009 2010 2011 2012 2013 Poland Australia World EU Source: World Bank, Report Doing Business 2013 – Smarter Regulations for Small and Medium-Size Enterprises; The Heritage Foundation Index of Economic Freedom (in partnership with The Wall Street Journal). *Average for EU countries, excluding Poland.

Page 11 Improved creditworthiness of Poland (1/2)

Outstanding economic performance in terms of GDP growth (“The Green island”). Recession to be avoided once again, contrary to many other EU and OECD member states. Continuous fiscal consolidation since 2011, reflected in the systematic reduction of structural deficit. Medium term objective – general government deficit of 1% of GDP, to be achieved in 2016. Political stability and implemented reforms, such as an increase of retirement age to 67 years. Reduced external imbalances, reflected in the improved current account balance. EU funds – stable source of financing the current account deficit (Poland is the biggest EU beneficiary).

bps. 1073 Poland’s credibility at the level of top-rated countries 500 400 CDS 5Y 2013-04-25 300 200 81 100 0

Source: Polish Ministry of Finance.

Page 12 Improved creditworthiness of Poland (2/2)

The improved perception of the Polish economy resulting also in rating outlook improvement – Poland dubbed a “safe heaven” in the CEE region. Capital inflows have recently contributed to record low government bond yields.

7.50 Yields on Polish bonds denominated in PLN 7.00

6.50

6.00

5.50

5.00

4.50

4.00

3.50

3.00

2.50 2008-09-01 2009-02-05 2009-07-13 2009-12-15 2010-05-24 2010-10-26 2011-04-04 2011-09-09 2012-02-16 2012-07-25 2013-01-02

Source: Polish Ministry of Finance. 2Y 5Y 10Y

Page 13 Opportunities in a downturn?

Poland ranked second most attractive European destination for investment (in terms of actual FDI inflows, Poland ranked 7th in the EU). In 2011 companies that invested in Poland’s automotive sector included Volkswagen AG and Bridgestone Corporation. Poland attracted international outsourcing and shared services centres. The country’s favourable labour-productivity ratio, which is far higher than in the Western Europe, also creates a significant competitive advantage for Poland.

What are the most attractive countries in Europe in the next 3 years? FDI projects in Poland – sources and sectors

Germany 35% Poland 10% Top five investing countries by Top five sectors by FDI projects United Kingdom 8% FDI projects (2011) (2011) Russia 7% US 20% Automotive 11% France 4% Romania 3% Business UK 15% 9% Czech Republic 3% services 2% Germany 14% Electronics 9% 2% Netherlands 2% Machinery and France 6% 9% Italy 2% equipment Spain 2% Sweden 2% South Korea 6% Food 6% Can't say 6%

Source: Opportunities in a downturn, Ernst & Young attractiveness survey. Source: Opportunities in a downturn, Ernst & Young attractiveness survey.

Page 14 Summary

►Despite strong economic and financial links with the Western Europe, the Polish economy has proven to be largely crisis-resistant: ►Poland was the only EU country that avoided recession. ►Polish GDP cumulative growth in 2008-2012 amounted to 18.1%, outperforming other EU Member States. ►Economic growth was supported by a strong private consumption, exchange rate depreciation, trade structure and competitive Polish exporters, strong fiscal impulse, and sound financial sector. ►Although economic slowdown has not been avoided, medium-term growth prospects are promising. ►Following the trough in 2013 Q1, a gradual economic recovery is expected, supported by a (moderate) revival in the euro area. ►Continued positive GDP growth and consistent fiscal consolidation have contributed to the improved perception of the Polish economy – a “safe heaven” in the CEE region.

Page 15 Thank you! Marek Rozkrut Ernst & Young Poland Chief Economist e-mail: [email protected] Tel.: +48 22 557 64 11

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