Economic Growth 7 Inflation 7 Exchange Rates 7 External Sector 8 Forecast Summary

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Country Report

Poland

November 2012

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Symbols for tables "0 or 0.0" means nil or negligible;"n/a" means not available; "-" means not applicable Poland 1

Poland

Forecast Highlights

Outlook for 2013-17 2 Political stability 3 Election watch 3 International relations 3 Policy trends 4 Fiscal policy 4 Monetary policy 5 International assumptions 6 Economic growth 7 Inflation 7 Exchange rates 7 External sector 8 Forecast summary

Data and charts 9 Annual data and forecast 10 Quarterly data 10 Monthly data 12 Annual trends charts 13 Monthly trends charts 14 Comparative economic indicators

Summary 14 Basic data 16 Political structure

Recent analysis Politics 18 Forecast updates 19 Analysis Economy 23 Forecast updates 35 Analysis

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 2 Highlights Editor: Katya Kocourek Forecast Closing Date: November 1, 2012 Outlook for 2013-17 The centre-right Civic Platform (PO) of the prime minister, Donald Tusk, has a small yet workable majority in parliament and is expected to remain in power until the next parliamentary election, in 2015. Increasing opposition from the right-wing Law and Justice (PiS) could serve to undermine the authority of the government, particularly over the pace of fiscal reform. The general government deficit, calculated according to EU harmonised (ESA 95) methodology, is forecast at 3% of GDP in 2013, shrinking from 5.1% in 2011 and an estimated 3.7% in 2012. Real GDP grew by 4.3% in 2011, driven by strong domestic demand and exports. We estimate it to decelerate to 2.4% in 2012. Export growth will be slow, owing to a recession in the euro zone and weak domestic demand. Inflation is estimated to remain high in 2012, at an average of 3.6%, stoked by the volatility of the zloty. It is expected to fall to an annual average of 2.7% in 2013-17, within the target range set by the central bank. The current-account deficit is expected to continue shrinking in 2012, to 3.8% of GDP, as the impact on imports of weak domestic demand outweighs the impact on exports of weakening external demand. Review For the first time in five years, the main right-wing opposition party, Law and Justice (PiS), has moved ahead of the PO in the opinion polls. Relations between the two parties remain tense. In his keynote parliamentary speech in mid-October, Mr Tusk announced a growth stimulus package for the economy, which includes new fixed investment and the diversion of privatisation revenue to the budget. Consumer price inflation stabilised in September. At 3.8% year on year, it was unchanged from August, despite higher fuel prices. Seasonally adjusted industrial output dropped by 1.4% year on year in September, in the first notable decline since September 2009. Seasonally adjusted construction output fell by 9.5% year on year in September, and continues to act as a drag on headline growth. In the 12 months to August the current-account deficit narrowed to Zl 63.5bn (US$19bn; around 4.1% of GDP) from Zl 74.5bn (4.9% of GDP) in 2011.

Outlook for 2013-17 Political stability A two-party coalition government, in power since the parliamentary election in October 2011, holds a small but workable majority in parliament. The coalition comprises the centre-right Civic Platform (PO), the largest party, and the rural-based Polish Peasants' Party (PSL). The PO leader, Donald Tusk, governs as prime minister in a second consecutive term in office. The opposition is divided between the conservative Law and Justice (PiS), the Democratic Left Alliance (SLD), and Palikot's Movement (RP), led by Janusz Palikot. The SLD emerged from the election politically weakened, and it is no longer the dominant party of the centre-left. The Economist Intelligence Unit expects Poland to be governed by a coalition throughout the forecast period. The constitution is designed to protect incumbent governments from early dismissal, thereby buttressing political stability. The president, Bronislaw Komorowski, comes from the PO, which favours the stability and continuity of a PO-PSL pairing. If a PiS-led administration were to return to power, it would probably be unstable, not least because cohabitation between a PiS-led government and Mr Komorowski would create considerable legislative uncertainty and ideological divisions. However, a coalition government formed between the PiS and other centre-right and centre- left parties could produce a more stable alliance in the medium term.

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 3 Election watch Poland faces three important elections during the forecast period. An election to the European Parliament is scheduled for mid-2014. The next general election is scheduled for late 2015. The possibility of voter weariness with the PO by 2014-15 could facilitate Mr Tusk's decision to run for the presidency in 2015. The PiS has regrouped following the parliamentary election in 2011. Its efforts to appeal to potential new voters appear to be yielding results, and its popularity ratings are rising. However, recent defections from the party have resulted in the formation of a new parliamentary faction, United Poland. The PiS could eventually provide a stronger challenge to the PO, particularly if its popularity ratings continue to rise steadily. The left-wing SLD suffered its worst recorded defeat in October 2011. It will need to rebuild its voter base, focusing on boosting support from the growing urban middle class.

International relations Poland's presidency of the EU ended in December 2011. The government will seek to increase Poland's influence within the EU, advocating deeper European integration. In March 2012 Poland (alongside 24 other EU members) signed the new EU fiscal treaty encouraging budgetary responsibility. Poland appears to be supportive of the German stance on fiscal austerity. It is also favours new pan-European initiatives proposed by the European Commission, such as the creation of a banking union. The government will lobby hard to preserve the flow of EU funds to Poland in the EU budget for 2014-20, although it is highly unlikely to secure as much as it did in the previous budget round. The government has worked hard on the issue of restoring Polish-Russian diplomatic relations following the Smolensk air crash in April 2010, as part of its attempt to shed Poland's anti-Russian image within the EU, and so shore up its alliance with France and repair strained ties with Germany. Nonetheless, disagreements over the Nord Stream pipeline will continue to blight Polish-Russian relations. The security relationship between Poland and the US should remain close, although Poland's readiness to participate in future NATO-led missions could wane.

Policy trends Economic policy in the immediate future is likely to be preoccupied with demonstrating fiscal prudence in order to bolster market confidence and demonstrate creditworthiness. This will be important to facilitate the continued servicing of loans without resorting to the flexible credit line (FCL) with the IMF, which is worth US$29.5bn and is due to expire in early 2013. However, with the recent announcement of fiscal loosening in the short term, the government's main preoccupation will be to encourage domestic stimulus for economic growth. As a result, investor sentiment has shifted more in favour of the growing Polish economy than previously, despite deepening recession in the euro zone. The government has outlined measures to narrow the budget deficit. In 2012 it increased employers' social security contributions by 2 percentage points (partially unwinding a tax reduction that came into force before the first wave of the financial crisis). The government is cancelling several tax breaks, and instituting new corporate and sector-specific taxes (such as excise taxes payable on fuel and tobacco products) from 2013. It will also implement a radical pension reform. The retirement age will start rising for men and women in 2013, and the special pension arrangements of certain occupational groups will be largely phased out. Besides a new tax on silver and copper extraction, the government is introducing new budgetary limits for local government, where deficits have grown substantially in recent years. Parliament has yet to approve changes to the taxation system, particularly for farmers and coal miners. There will be a strong incentive to push ahead with privatisation in the early part of the forecast period, owing to fiscal pressure. As announced in the government's new spending package, revenue from privatisation programmes in 2013 will be diverted to the state budget in a bid to improve the public finances.

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 4 Fiscal policy Under EU rules on the excessive-deficit procedure, Poland has until the end of 2012 to narrow the general government deficit to less than 3% of GDP, from 5.1% in 2011. We do not expect the deficit to shrink to 3% of GDP until 2013, owing to the impact of slowing economic growth in 2012. In a revised draft of the state budget for 2013, released on September 4th, the government admits that it is unlikely to reach the 3% fiscal deficit target in 2012, and now forecasts a budget deficit of 3.5% of GDP. The draft budget projects a state budget deficit of Zl 35bn (US$10.7bn), which raises doubt about whether the agreement will meet the 3% fiscal deficit target in 2013. The main structural obstacle to fiscal consolidation is that a large proportion of government spending is mandatory. Rules introduced to limit increases in discretionary and local government expenditure will be insufficient to produce the large falls in government spending that the EU convergence programme requires. The constitution sets a limit on public debt of 60% of GDP (measured on a national definition, separate from the EU harmonised ESA 95 definition), and other laws impose severe restrictions on budgetary freedom when debt exceeds 55% of GDP. Temporary sources of revenue, such as privatisation and dividends from state-controlled companies, helped to keep debt (on the national measure) just below 55% of GDP in 2011. There remains a risk in the short term that the threshold will be breached as one-off revenue sources dwindle or fail to be realised in a timely manner, owing to unfavourable market conditions, and as economic growth slows. In order to stabilise public debt more securely, the government will need to take concrete revenue-boosting steps to narrow the budget deficit in addition to those proposed as part of its fiscal consolidation programme. We forecast that after contracting to 3.7% of GDP in 2012, and below the threshold level of 3% in 2013, the ESA 95 deficit will narrow to an annual average of around 2% of GDP in 2014-17. Public debt (on an ESA 95 basis) should peak in 2014. However, we expect debt levels to remain high in 2017, at almost 50% of GDP. The most obvious risk to fiscal targets comes from the weakening of the external and domestic economic environment in 2012-13. Higher borrowing, and slower than expected real GDP growth, will make it more difficult to ensure that public debt, measured on the national definition, remains below 55% of GDP (this measure of public debt was 53.9% of GDP in mid-2012). Given that breaching this barrier would sharply limit the government's future room for manoeuvre, as a result of the constraints laid down by the public finance law once debt rises above 55% of GDP, the Ministry of Finance may investigate technical changes—such as the exchange rate to be used in valuing foreign debt—in order to reduce the danger of debt moving above this threshold.

Monetary policy The monetary policy council (MPC) of the National Bank of Poland (NBP, the central bank) raised the benchmark interest rate to 4.75% from 4.5% in early May. This increase stemmed from the MPC's concerns about above-target inflation entrenching stronger inflationary expectations and the possibility of further exchange-rate weakness. With the stabilisation of inflation and declining domestic demand, a fresh round of monetary loosening appears highly likely. We expect the NBP to continue its efforts to meet the official inflation target of 2.5% (±1 percentage point) over the medium term, despite fluctuations in the short term owing to currency volatility and upward pressure on commodity prices. Tension between maintaining exchange-rate stability and setting monetary policy to meet the inflation target will become more acute when Poland joins the EU's exchange-rate mechanism (ERM2), two-year membership of which is a requirement for admission to the euro zone. Poland is not in a rush to join the euro zone, and the PO-led government has indicated no fixed target date for entry into European economic and monetary union (EMU). The earliest likely date is 2016, but the severity of the euro zone crisis has dampened commitment to the single currency.

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 5 International assumptions 2012 2013 2014 2015 2016 2017 Economic growth (%) US GDP 2.1 2.1 2.3 2.3 2.4 2.4 OECD GDP 1.4 1.6 2.1 2.1 2.2 2.0 EU27 GDP -0.3 0.4 1.4 1.5 1.5 1.5 Euro area GDP -0.4 0.4 1.2 1.4 1.4 1.2 World GDP 2.2 2.5 2.9 2.9 3.0 2.9 World trade 3.3 4.5 5.3 5.6 5.7 5.7 Inflation indicators (% unless otherwise indicated) US CPI 2.0 2.4 2.4 2.2 2.3 2.1 OECD CPI 2.2 2.1 2.2 2.2 2.2 2.2 EU27 CPI 2.4 2.1 2.1 2.3 2.2 2.1 Manufactures (measured in US$) -0.6 0.5 0.3 0.8 1.3 1.7 Oil (Brent; US$/b) 111.0 103.4 104.5 107.3 110.0 115.0 Non-oil commodities (measured in US$) -9.9 1.6 -2.0 1.1 1.1 1.6 Financial variables US$ 3-month commercial paper rate (av; %) 0.2 0.2 0.2 0.3 1.2 2.2 € 3month rate 0.6 0.2 0.6 1.1 1.8 1.8 US$:€ (av) 1.28 1.26 1.25 1.24 1.26 1.26 Zl:US$ (av) 3.27 3.21 3.15 3.03 2.86 2.79 Zl:€ (av) 4.20 4.05 3.95 3.75 3.60 3.51

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 6 Economic growth The economy grew by 4.3% in 2011. We expect slower real GDP growth in 2012, of 2.4%, as the euro zone is in recession. External and internal demand will be much weaker in 2012, with negative implications for exports, industrial production and employment. However, the weaker zloty should help to keep exports competitive, and net exports are expected to continue contributing positively to headline economic growth. Poland remains exposed to a slowdown in external demand from the EU via the trade channel. Around 27% of Polish exports are bought by Germany, but, crucially, Germany is expected to avoid recession in 2012. Growth slowed to 2.5% year on year in the second quarter of 2012 from 3.6% in the first quarter, according to revised estimates. The Euro 2012 football championships cushioned the economy with high levels of fixed investment. With these over, the euro zone crisis is having an impact on the economy, particularly on export growth. Manufacturing weakened significantly in the first nine months of 2012. The economy will continue to lose momentum in the final quarter as more trading partners in the euro zone slide into recession. Weaker investment activity, as the impact of increased fixed investment from Euro 2012 drops off in the third quarter, will also act as a significant drag on headline economic growth. Retail demand was solid in the first half of 2012, but has started to wane as conditions on the labour market deteriorate, with higher unemployment, worsening economic sentiment and weakening credit availability. This combination of factors, in addition to slowing growth in real and nominal wages as high inflation undercuts spending power, are expected to continue to dampen household demand in the final quarter of 2012. It is highly unlikely that domestic demand or consumer spending will be able to support real GDP growth in the way that it did during the international financial crisis of 2008-09. Domestic demand is expected to rebound gradually after 2013 as consumer confidence and foreign demand recover, with related improvements in labour and credit markets. In this period more private firms are expected to increase capacity expansion as they factor in improving sales prospects at home and abroad. We expect a tepid recovery in 2013. Real GDP is forecast to grow by 2.1% as the euro zone crisis undermines export performance. Economic growth should begin to accelerate thereafter, particularly following Poland's exit from the EU's excessive-deficit procedure once the urgency of fiscal reform has receded. We forecast that real GDP growth will average 3.3% per year in 2013-17, considerably slower than average growth of 4.7% in 2005-09. The most important downside risk for economic growth is the euro zone crisis. Actions taken by the European Central Bank (ECB, the euro area's central bank) to improve liquidity among lenders in the region have been positive for Poland. The euro zone still faces serious short- and medium-term fiscal and financial problems. The exposure of foreign owners of Polish banks to distressed euro zone debt heightens the threat of deleveraging and contagion, and will remain a risk in the early years of the forecast period. Economic growth % 2012a 2013b 2014b 2015b 2016b 2017b GDP 2.4 2.1 3.2 3.4 3.9 4.1 Private consumption 1.5 1.5 2.1 3.4 3.9 4.2 Government consumption -0.7 -1.0 1.3 2.0 2.2 2.5 Gross fixed investment 3.0 1.9 4.9 5.6 6.0 6.3 Exports of goods & services 2.6 3.4 4.7 6.3 7.0 7.7 Imports of goods & services -1.5 1.2 5.0 6.8 8.3 9.5 Domestic demand 0.8 1.2 3.3 3.6 4.5 5.0 Agriculture 0.7 1.0 1.3 1.5 1.5 1.3 Industry 5.5 5.2 6.5 6.8 7.0 7.2 Services 0.9 0.6 1.5 1.6 2.2 2.3 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 7 Inflation In 2011 inflation averaged 4.2%, up from 2.7% in 2010, owing to a rise of 1 percentage point in value-added tax (VAT) and zloty depreciation against the euro. This is outside the target range of the NBP, of 1.5-3.5%. In the short term inflationary pressures are expected to persist, as a result of high global commodity and fuel prices, even though disinflationary trends are already apparent across the EU amid waning consumer demand. Inflation is estimated to average 3.6% year on year in 2012, in part owing to Poland's sensitivity to the price of oil, and a weaker zloty against the US dollar and the euro. In 2013 lower international commodity prices will aid disinflation, as will zloty appreciation and inflation-targeting by the NBP. These factors are forecast to keep inflation below 3% in 2014-17.

Exchange rates Amid volatility on international currency markets, the zloty was hit especially hard in the second half of 2011 and the first half of 2012, depreciating sharply against the US dollar and the euro. The zloty stabilised at the start of the third quarter, following injections of liquidity into the European banking system by the ECB, which improved financial market sentiment. However, the zloty is expected to weaken slightly in the fourth quarter, in anticipation of a new monetary loosening cycle. The zloty remains vulnerable to changes in investor sentiment and risk appetite, as well as monetary policy trends in the domestic economy. These will be influenced by events in the euro zone and by domestic developments, with respect to the budget deficit and the current-account deficit in particular. Our central forecast is that the zloty will return to a trend of appreciation against the US dollar after 2012. The main risk to this expectation is that investors lose confidence in the ability and political will of the government to make progress on fiscal consolidation.

External sector The current-account deficit reached 4.9% of GDP in 2011. The winding down of large infrastructure projects related to Euro 2012, combined with less robust consumption growth in 2012, should allow the trade deficit to moderate. We estimate a smaller current-account deficit, of 3.8% of GDP, in 2012. The income deficit will remain relatively large, but the transfers surplus will be higher than historically, owing to inflows of funds from the EU. The current-account deficit is forecast to average around 3.6% of GDP annually in 2013-17. The financing requirement will be met mainly through a combination of new debt issuance and rollover of existing debt. Net inflows of foreign direct investment (FDI) are forecast to cover around 40% of the current-account deficit on average in 2013-17. In conditions of rising financial market distress, Poland's large financing needs and reliance on portfolio inflows to cover the external deficit are potential sources of weakness. If need be, Poland could access funds from the IMF's FCL.

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 8 Forecast summary Forecast summary (% unless otherwise indicated) 2012a 2013b 2014b 2015b 2016b 2017b Real GDP growth 2.4 2.1 3.2 3.4 3.9 4.1 Industrial production growth 2.3 3.8 6.0 7.8 9.3 9.9 Gross fixed investment growth 3.0 1.9 4.9 5.6 6.0 6.3 Unemployment rate (av) 12.6 13.1 12.8 11.0 9.0 7.2 Unemployment rate (av; EU standardised measure) 10.3 11.1 11.0 9.5 7.7 5.9 Consumer price inflation (av; national measure) 3.6 2.9 2.7 2.7 2.6 2.5 Consumer price inflation (end-period; national measure) 3.1 2.7 2.6 2.6 2.5 2.4 Consumer price inflation (av; EU harmonised measure) 3.5 2.9 2.7 2.7 2.6 2.5 Short-term lending rate 8.6 8.1 7.5 6.8 6.6 6.6 State budget balance (% of GDP) -2.1 -1.7 -1.8 -2.1 -2.5 -3.3 General government balance (ESA; % of GDP)c -3.7 -3.0 -2.8 -2.1 -1.6 -1.4 Exports of goods fob (US$ bn) 190.9 202.6 222.2 252.6 295.6 334.3 Imports of goods fob (US$ bn) 204.4 215.8 240.3 274.0 315.8 353.9 Current-account balance (US$ bn) -18.3 -18.4 -20.3 -22.9 -22.1 -22.0 Current-account balance (% of GDP) -3.8 -3.6 -3.8 -3.9 -3.5 -3.2 External debt (end-period; US$ bn) 311.4 312.4 312.0 309.8 316.6 316.6 Exchange rate Zl:US$ (av) 3.27 3.21 3.15 3.03 2.86 2.79 Exchange rate Zl:US$ (end-period) 3.24 3.18 3.09 2.94 2.82 2.76 Exchange rate Zl:€ (av) 4.55 4.08 3.98 3.80 3.54 3.52 Exchange rate Zl:€ (endperiod) 4.19 4.06 3.88 3.64 3.54 3.47 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c In line with Eurostat recommendations, excluding the open pension funds from the government sector.

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 9 Data and charts Annual data and forecast

2008a 2009a 2010a 2011a 2012b 2013c 2014c GDP Nominal GDP (US$ bn) 529.3 429.6 468.9 513.0 486.3 511.6 538.9 Nominal GDP (Zl bn) 1,275 1,341 1,415 1,520 1,591 1,641 1,700 Real GDP growth (%) 5.0 1.7 3.9 4.3 2.4 2.1 3.2 Expenditure on GDP (% real change) Private consumption 5.3 2.4 3.0 2.5 1.5 1.5 2.1 Government consumption 6.7 2.7 3.6 -0.9 -0.7 -1.0 1.3 Gross fixed investment 9.6 -1.2 -0.4 9.0 3.0 1.9 4.9 Exports of goods & services 6.1 -6.0 12.1 7.8 2.6 3.4 4.7 Imports of goods & services 6.8 -11.4 13.8 5.6 -1.5 1.2 5.0 Origin of GDP (% real change) Agriculture -1.4 8.8 -4.3 -0.8 0.7 1.0 1.3 Industry 6.0 3.0 7.3 9.1 5.5 5.2 6.5 Services 5.3 0.2 3.0 2.5 0.9 0.6 1.5 Population and income Population (m) 38.1 38.2 38.2 38.2b 38.1 38.1 38.0 GDP per head (US$ at PPP) 17,566b 17,987b 18,909b 20,160b 21,060 21,961 23,168 Recorded unemployment (av; %) 9.8 11.0 12.1 12.4 12.6 13.1 12.8 Fiscal indicators (% of GDP) State budget balance -1.9 -1.8 -3.2 -1.7 -2.1 -1.7 -1.8 Central government debt 46.7 49.4 52.8 53.4b 53.5 52.6 51.4 General government balance (ESA) -3.7 -7.3 -7.8 -5.1 -3.7 -3.0 -2.8 General government debt (ESA) 47.1 50.9 54.9 56.4 54.7 54.9 53.7 Prices and financial indicators Exchange rate Zl:US$ (av) 2.41 3.12 3.02 2.96 3.27 3.21 3.15 Exchange rate Zl:€ (av) 3.52 4.33 3.99 4.12 4.20 4.05 3.95 Consumer prices (av; %) 4.3 3.8 2.7 4.2 3.6 2.9 2.7 Producer prices (av; %) 2.3 3.4 2.2 7.6 4.6 3.2 3.5 Stock of money M2 (% change) 20.2 8.2 8.4 11.5 9.6 6.5 7.1 Money market interest rate (av; %) 5.8 3.2 3.1 4.1 4.5 4.2 4.0 Current account (US$ m) Trade balance -30,729 -7,642 -11,782 -14,107 -13,477 -13,252 -18,109 Goods: exports fob 178,701 142,071 165,901 195,194 190,884 202,571 222,230 Goods: imports fob -209,430 -149,713 -177,683 -209,301 -204,361 -215,823 -240,340 Services balance 5,010 4,784 3,103 5,683 5,545 5,445 6,561 Income balance -12,842 -16,568 -19,113 -22,893 -16,788 -16,321 -15,342 Current transfers balance 3,647 2,148 3,728 6,278 6,438 5,750 6,595 Current-account balance -34,914 -17,278 -24,064 -25,039 -18,281 -18,378 -20,295 External debt (US$ m) Debt stock 218,022 250,744b 297,310b 320,067b 311,387 312,445 311,973 Debt service paid 57,188 50,307b 52,847b 66,259b 68,653 71,278 76,329 Principal repayments 47,732 43,878b 46,354b 57,689b 61,032 64,495 68,797 Interest 9,456 6,429b 6,493b 8,570b 7,621 6,783 7,532 International reserves (US$ m) Total international reserves 62,168 79,576 93,488 97,856 98,528 99,422 101,271 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. Source: IMF, International Financial Statistics.

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 10 Quarterly data 2010 2011 2012 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Central government finance (Zl bn) Revenue 101.7 107.2 102.6 108.2 114.5 116.9 111.5 119.7 Expenditure 113.0 125.4 120.2 121.0 116.4 127.8 129.3 125.8 Balance -11.3 -18.2 -17.5 -12.8 -1.8 -10.9 -17.9 -6.1 Output GDP at current prices (Zl bn) 350.6 398.1 348.5 368.9 375.4 430.5 370.7 388.3 Real GDP (% change, year on year) 4.7 3.9 4.4 4.7 4.0 4.2 3.6 2.5 Industrial production index (2000=100) 136.3 141.3 137.5 141.0 144.1 151.9 143.9 144.9 Industrial production (% change, year on year) 11.9 9.8 9.0 5.4 5.7 7.5 4.7 2.7 Employment, wages and prices Employment ('000) 16,199 16,075 15,875 16,163 16,284 16,201 15,981 16,204 Employment (% change, year on year) 1.1 1.2 1.9 1.1 0.5 0.8 0.7 0.3 Registered unemployment ('000) 1,809 1,877 2,130 1,963 1,860 1,922 2,144 2,017 Unemployment rate (% of the labour force) 11.5 11.9 13.3 12.4 11.8 12.1 13.3 12.6 Average gross monthly wages (Zl)a 3,415 3,605 3,482 3,561 3,595 3,772 3,668 n/a Average monthly wages (% change, year on year) 3.3 4.3 4.3 5.3 5.3 4.6 5.3 n/a Consumer prices (2000=100) 155.0 157.3 158.2 162.1 161.4 164.5 164.7 168.5 Consumer prices (% change, year on year) 2.2 2.9 3.8 4.6 4.1 4.6 4.1 4.0 Producer prices (2000=100) 114.3 115.0 118.1 120.6 122.4 125.0 125.4 126.3 Producer prices (% change, year on year) 4.1 5.0 7.8 6.9 7.1 8.7 6.2 4.8 Financial indicators Exchange rate Zl:US$ (av) 3.11 2.92 2.89 2.75 2.94 3.28 3.23 3.32 Exchange rate Zl:€ (av) 4.01 3.97 3.94 3.96 4.15 4.42 4.23 4.26 Deposit rate (av; %) 4.0 4.0 3.9 4.0 4.2 4.5 n/a n/a Lending rate (av; %) 8.3 8.3 8.3 8.4 8.6 8.7 n/a n/a 3-month money market rate (av; %) 3.1 3.1 3.5 4.0 4.5 4.4 4.4 4.7 M1 (end-period; Zl bn) 419.2 449.2 458.9 451.2 444.8 468.1 454.3 462.7 M1 (% change, year on year) 12.4 15.7 17.8 8.7 6.1 4.2 -1.0 2.5 M2 (end-period; Zl bn) 744.5 774.7 792.7 788.1 814.3 863.7 860.0 868.8 M2 (% change, year on year) 8.6 8.4 11.2 7.0 9.4 11.5 8.5 10.2 Stockmarket index (end-period) 2,615 2,744 2,817 2,802 2,189 2,144 2,287 2,275 Stockmarket index (% change in US$ terms, year on year) 17.7 10.5 14.8 52.2 -24.8 -32.2 -26.5 -34.1 Foreign trade (Zl m) Exports fob 123,028 125,320 130,414 136,312 141,246 150,768 147,430 147,707 Imports cif 137,860 144,257 143,611 155,078 156,852 167,833 161,080 158,686 Trade balance -14,831 -18,936 -13,197 -18,766 -15,606 -17,065 -13,651 -10,980 Foreign payments (US$ m)b Merchandise trade balance -3,192 -4,536 -2,668 -4,545 -3,392 -3,502 -2,776 -2,104 Services balance 461 811 1,259 2,018 1,491 915 1,425 2,034 Income balance -5,359 -5,257 -4,549 -6,834 -6,391 -5,119 -5,128 -5,072 Net transfer payments 502 -133 1,037 3,481 1,047 713 598 2,379 Current-account balance -7,588 -9,115 -4,921 -5,880 -7,245 -6,993 -5,881 -2,763 Reserves excl gold (end-period) 94,302 88,848 101,896 104,156 94,950 92,656 94,231 96,195 a The figures include mandatory social security contributions. b National Bank of Poland transactions-based series. Sources: Central Statistical Office, Statistical Bulletin; National Bank of Poland; IMF, International Financial Statistics.

Monthly data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Budget revenue (Zl bn) 2010 34.0 29.7 32.4 35.2 29.8 31.2 35.0 33.3 33.4 35.5 36.3 35.3 2011 37.3 31.9 33.5 39.0 34.7 34.4 38.5 38.1 38.0 41.4 38.1 37.4 2012 42.2 36.5 32.9 47.9 35.8 36.0 40.6 39.1 n/a n/a n/a n/a Budget expenditure (Zl bn) 2010 33.0 41.7 41.1 42.4 36.4 36.2 37.8 37.2 38.0 38.4 39.8 47.2 2011 36.0 43.8 40.3 45.2 37.9 37.8 39.2 37.5 39.6 42.1 39.8 45.9 2012 42.3 46.5 40.6 49.8 38.3 37.7 44.2 37.8 n/a n/a n/a n/a Budget balance (Zl bn)

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 11 2010 1.0 -12.1 -8.7 -7.2 -6.6 -5.0 -2.8 -3.9 -4.6 -2.9 -3.5 -11.9 2011 1.3 -11.9 -6.8 -6.2 -3.2 -3.4 -0.7 0.6 -1.7 -0.7 -1.6 -8.5 2012 -0.1 -10.0 -7.7 -1.9 -2.5 -1.7 -3.5 1.4 n/a n/a n/a n/a Exchange rate Zl:US$ (av) 2010 2.85 2.93 2.87 2.89 3.24 3.36 3.20 3.09 3.03 2.85 2.89 3.02 2011 2.91 2.88 2.87 2.75 2.75 2.76 2.80 2.87 3.15 3.18 3.27 3.40 2012 3.39 3.16 3.13 3.17 3.37 3.43 3.41 3.30 3.22 n/a n/a n/a Exchange rate Zl:€ (av) 2010 4.07 4.01 3.89 3.87 4.06 4.10 4.08 3.99 3.96 3.95 3.95 4.00 2011 3.89 3.93 4.01 3.97 3.94 3.97 3.99 4.12 4.33 4.35 4.43 4.48 2012 4.37 4.18 4.14 4.18 4.30 4.30 4.19 4.09 4.14 n/a n/a n/a Real effective exchange rate index (CPI-based; 1997=100) 2010 121.1 121.5 124.6 125.1 117.5 115.9 117.9 120.1 122.7 125.6 125.0 122.4 2011 125.9 125.6 124.0 126.5 128.5 127.4 126.2 121.5 114.6 114.8 112.8 111.0 2012 112.5 118.7 119.7 118.7 115.3 115.2 117.2 118.8 n/a n/a n/a n/a Money market interest rate (3 months; %) 2010 2.8 2.9 3.0 3.2 3.2 3.2 3.1 3.2 3.0 3.2 3.0 3.1 2011 3.3 3.4 3.7 3.8 3.8 4.3 4.5 4.5 4.5 4.5 4.6 4.2 2012 4.3 4.4 4.6 4.5 4.7 4.9 4.8 4.9 n/a n/a n/a n/a Long-term bond yield (10 years; %) 2010 6.1 6.1 5.7 5.6 5.7 5.9 5.8 5.6 5.5 5.5 5.8 6.0 2011 6.3 6.3 6.3 6.1 6.1 5.9 5.8 5.7 5.7 5.7 5.8 5.8 2012 5.7 5.5 5.4 5.5 5.4 5.2 5.0 n/a n/a n/a n/a n/a Industrial production (% change, year on year) 2010 8.5 9.2 12.5 9.7 13.5 14.3 10.5 13.6 11.7 8.0 10.0 11.4 2011 10.2 10.4 6.8 6.7 7.8 1.9 1.8 7.9 7.4 6.4 8.5 7.6 2012 9.1 4.8 0.8 2.8 4.3 1.2 5.4 0.6 -5.2 n/a n/a n/a Retail sales (% change, year on year) 2010 -1.1 -2.8 5.9 -4.0 2.0 4.5 2.4 5.1 6.4 6.4 6.1 9.1 2011 2.3 8.6 5.1 13.6 8.5 6.4 4.2 6.9 7.7 6.8 7.4 4.2 2012 9.9 8.9 6.9 1.8 4.3 2.6 3.4 2.3 -0.4 n/a n/a n/a Consumer prices (% change, year on year; av) 2010 3.5 2.9 2.6 2.4 2.2 2.3 2.0 2.0 2.5 2.8 2.7 3.1 2011 3.6 3.6 4.3 4.5 5.0 4.2 4.1 4.3 3.9 4.3 4.8 4.6 2012 4.1 4.3 3.9 4.0 3.6 4.3 4.0 3.8 3.8 n/a n/a n/a Producer prices (% change, year on year; av) 2010 0.2 -2.4 -2.6 -0.4 1.9 2.1 3.8 4.0 4.3 3.9 4.7 6.2 2011 6.2 7.5 9.5 8.8 6.3 5.6 5.9 6.8 8.4 8.5 9.1 8.2 2012 7.9 6.0 4.4 4.4 5.2 4.4 3.6 3.0 1.8 n/a n/a n/a Average monthly wages (% change, year on year) 2010 0.5 2.9 4.8 3.2 4.8 3.5 2.1 4.2 3.7 3.9 3.6 5.4 2011 5.0 4.1 4.0 5.9 4.1 5.8 5.2 5.4 5.2 5.1 4.4 4.4 2012 8.1 4.3 3.8 3.4 3.8 4.3 2.4 2.7 1.6 n/a n/a n/a Registered unemployed ('000) 2010 2,053 2,102 2,077 1,974 1,908 1,844 1,813 1,800 1,813 1,819 1,858 1,955 2011 2,105 2,150 2,134 2,044 1,963 1,883 1,863 1,855 1,862 1,868 1,915 1,983 2012 2,122 2,168 2,142 2,073 2,014 1,964 1,953 1,965 1,979 n/a n/a n/a Unemployment rate (% of the labour force) 2010 12.9 13.2 13.0 12.4 12.1 11.7 11.5 11.4 11.5 11.5 11.7 12.4 2011 13.1 13.4 13.3 12.8 12.4 11.9 11.8 11.8 11.8 11.8 12.1 12.5 2012 13.2 13.4 13.3 12.9 12.6 12.3 12.3 12.4 12.4 n/a n/a n/a Total exports fob (Zl m) 2010 33,218 35,920 39,697 40,799 40,022 43,054 40,591 38,077 44,361 43,939 42,551 38,830 2011 40,051 42,330 48,033 44,637 46,415 45,260 42,487 45,946 52,813 52,071 52,126 46,570 2012 48,367 47,699 51,364 47,966 50,033 49,708 49,306 46,849 n/a n/a n/a n/a Total imports cif (Zl m) 2010 36,134 39,652 44,643 42,485 44,284 46,906 45,435 44,137 48,288 48,787 49,527 45,942 2011 44,034 46,956 52,621 51,389 52,022 51,666 48,957 51,626 56,269 56,929 57,445 53,459 2012 52,960 52,954 55,167 50,967 54,980 52,739 51,720 47,990 n/a n/a n/a n/a Trade balance (fob-cif basis; Zl m) 2010 -2,917 -3,732 -4,946 -1,686 -4,262 -3,852 -4,844 -6,060 -3,927 -4,848 -6,976 -7,113 2011 -3,984 -4,626 -4,588 -6,753 -5,607 -6,407 -6,470 -5,680 -3,456 -4,858 -5,319 -6,889 2012 -4,593 -5,255 -3,803 -3,001 -4,947 -3,032 -2,414 -1,141 n/a n/a n/a n/a Current-account balance (US$m)

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 12 2010 -1,456 -272 -2,002 -1,183 -951 -1,497 -2,369 -2,883 -2,336 -2,511 -3,871 -2,733 2011 -2,100 -1,220 -1,601 -2,261 -449 -3,170 -2,727 -2,395 -2,123 -2,741 -1,756 -2,496 2012 -2,576 -2,534 -771 -964 -515 -1,284 -870 -785 n/a n/a n/a n/a Foreign-exchange reserves excl gold (US$ m) 2010 81,504 81,463 81,561 84,688 82,498 81,355 89,289 88,996 94,302 95,299 92,014 88,848 2011 91,331 98,870 101,896 106,908 102,523 104,156 101,327 100,949 94,950 96,996 93,027 92,656 2012 94,568 95,978 94,231 97,308 93,028 96,195 96,910 98,039 99,875 n/a n/a n/a Sources: IMF, International Financial Statistics; Central Statistical Office; National Bank of Poland; Haver Analytics.

Annual trends charts

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 13 Monthly trends charts

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 14 Comparative economic indicators

Basic data Land area 311,889 sq km, of which 61% agricultural, 30% forest Population 38.2m (April 2011 official estimate)

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 15 Main towns Population in '000, December 2009 Warsaw (capital): 1,714 Gdansk: 457 Krakow: 755 Szczecin: 406 Lodz: 742 Bydgoszcz: 358 Wroclaw: 632 Lublin: 349 Poznan: 554 Katowice: 309 Climate Temperate. The central European location yields a climate in which warm summers and cold winters are the norm. The average temperature during the year is about 57°C. The hottest month is July, with an average temperature in the range of 1619°C. In the winter the coldest temperature is in January. June and July are usually the wettest months of the year Weather in Warsaw (altitude 106 metres) Hottest month, July, 1524°C (average daily minimum and maximum); coldest month, January, minus 50°C; driest month, January, 23 mm average monthly rainfall; wettest month, July, 76 mm average monthly rainfall Language Polish Measures Metric system Currency Zloty (Zl) Fiscal year Calendar year Time One hour ahead of GMT/BST Public holidays January 1st (New Year's Day); Easter Monday; May 1st (Labour Day); May 3rd (Polish National Day, Proclamation of 1791 Constitution); Corpus Christi (June 7th in 2012); August 15th (Assumption); November 1st (All Saints' Day); November 11th (Independence Day); December 25th-26th (Christmas)

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 16

Political structure Official name Republic of Poland Form of state Parliamentary republic National legislature Bicameral: Sejm (lower house) of 460 members; Senate (upper house) of 100 members Electoral system Universal direct suffrage over the age of 18 National elections October 2011 (parliamentary); June-July 2010 (presidential). The next parliamentary election is scheduled for late 2015; the next presidential election is scheduled for mid-2015 Head of state President, elected by universal suffrage; currently Bronislaw Komorowski, elected on July 4th 2010 National government Council of Ministers headed by the prime minister, responsible to parliament Main political groupings

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 17 Civic Platform (PO), a centre-right movement with many former members of Solidarity parties; Law and Justice (PiS), a right-wing grouping based on a law-and-order platform; Polish Peasants' Party (PSL), a left-of-centre grouping representing farming communities; Palikot's Movement (RP), an anti-clerical liberal party representing, among others, minority groups in Polish society; Left and Democrats (LiD) coalition, a loose grouping including the Democratic Left Alliance (SLD), the direct successor to the Communist Party, which has recast itself as a social democratic movement Prime minister: Donald Tusk (PO) Deputy prime minister & economy minister: Waldemar Pawlak (PSL) Key ministers Agriculture & rural development: Stanislaw Kalemba (PSL) Culture: Bogdan Zdrojewski (PO) Defence: Tomasz Siemoniak (PO) Education: Krystyna Szumilas (PO) Environment: Marcin Korolec (independent) Finance: Jacek Rostowski Foreign affairs: Radoslaw Sikorski (PO) Health: Bartosz Arlukowicz (PO) Interior: Jacek Cichocki (independent) Justice: Jaroslaw Gowin (PO) Labour & social policy: Wladyslaw Kosiniak-Kamysz (PSL) Regional development: Elzbieta Bienkowska Science & higher education: Barbara Kudrycka Sport & tourism: Joanna Mucha (PO) Transport, construction & maritime economy: Slawomir Nowak (PO) Treasury: Mikolaj Budzanowski (independent) Central bank governor Marek Belka

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 18 Recent analysis

Generated on November 22nd 2012 The following articles were published on our website in the period between our previous forecast and this one, and serve here as a review of the developments that shaped our outlook. Politics Forecast updates October 12, 2012: Political stability Law and Justice moves ahead of Civic Platform in polls Event For the first time in five years, the main opposition party, the right-wing PiS, has moved ahead of the governing centrist PO in opinion polls. Analysis A recent survey by TNS Polska put support for the PiS at 39%, 6 percentage points ahead of the PO. The latest poll, released by TNS on October 11th, suggests that the PiS has improved its popularity rating further, to 42%, compared with 38% for PO. Support for the PO-led government and the prime minister has slumped since late 2011, when it became the first governing party to be re-elected since the fall of communism. Support for the government has continued to slide since the start of the year, following PR gaffes, the introduction of an unpopular pension reform, and scandals linking the government to cronyism and corruption allegations. Until now the PiS was unable to capitalise on this. However, in recent weeks it has taken steps to wrest the political initiative away from the government. These include the adoption of less aggressive and confrontational rhetoric, particularly in relation to the Smolensk air crash of April 2010, and the party's renewed focus on social and economic issues, including a high-profile public debate with leading economists. The latest poll underlines a trend showing a narrowing gap in support between the two main parties, which was evident in earlier surveys. Apart from providing the PiS with a confidence boost, the poll has unsettled PO supporters who have been critical of the government's passivity and failure to respond effectively to the PiS's rising popularity ratings. PO members hope that the prime minister's policy speech on October 12th will help the government to launch a counter-campaign, and provide it with new momentum by unveiling policies to tackle the economic slowdown by helping to reverse rising unemployment, and providing support to families and businesses. The PO might also freshen up the government through a ministerial reshuffle, but it will be wary about pushing ahead too rapidly with controversial and potentially unpopular reforms that could further damage its public support. Impact on the forecast We continue to expect the government to remain in place until the next scheduled election, in 2015.

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 19 Analysis October 5, 2012 Scrambling for cash Poland's scramble to sell state companies to raise money for the stretched budget is gaining pace, with an announcement that a controlling stake in a large energy company will be sold in the next few months. Such moves mean that the government stands a decent chance of meeting ambitious privatisation revenue targets for 2012-13, despite a flat market. That is essential for making the budget sums work. However, the approach remains flawed. The state is forcing state companies to postpone investment so that they can pay higher dividends to help the budget. The privatisation drive relies heavily on local and financial investors, with the government wary of foreign buyers and of ceding control over core sectors, including banking and energy. This will help the budget, but it is not good for the companies themselves. At the start of October the Treasury announced that it would launch an IPO of its 50% stake in the country's fifth- largest electricity producer, ZE PAK, in the third or fourth quarter. The banks running the stock exchange issue reckon that the stake will fetch Zl 1.5bn-3.7bn (US$474m-1.2bn), making it likely that the government will meet its Zl 10bn privatisation target for 2012. Company stakes worth Zl 8bn have already been sold so far in 2012. The ZE PAK IPO will probably be the largest listing on the Warsaw Stock Exchange in 2012. The Treasury is also reviving the sale of a property company, PHN. The company's chief executive said in September that it would be listed on the stock exchange in November. Created in 2011 to pool 180 state-owned real estate and land holdings, it manages a property portfolio worth an estimated Zl 2.5bn, including Intraco, a large office building in Warsaw that needs an overhaul, and some expensive houses in the capital. In June its flotation was delayed for lack of appetite on the Warsaw bourse, and flagging property prices. The government is determined to sell Both of these deals send a strong message that Poland is determined to sell these companies despite low market valuations. ZE PAK was originally supposed to be merged with another state energy company, but the Treasury decided to sell it by itself when this proved impossible for legal reasons. Some of the other large privatisations postponed in 2012 are being revived too, most notably the sale of a minority state in PKO Bank. This is now planned for 2013, when the Treasury is chasing Zl 5bn in privatisation revenue. Together with the sale of some other large companies in 2013, including Energa, this makes the Treasury confident that it will meet the total Zl 15bn target for privatisation revenue in 2012-13. However, the scramble for short-term budget cash could end up being damaging. State companies are being ordered to pay heavier dividends and to delay all but strategic investment to funnel cash to the Treasury. Energa has been told to pay out more than 50% of annual profits in dividends in 2012 and 2011, for example, against a board recommendation of 30%. The other main problem is that the government is trying to accelerate privatisation while remaining wary of foreign investors. The sale of Lotos, an oil refiner, was cancelled earlier in the year because the only interested buyers were Russian. There are signs that the government is trying to create national champions through some of these sales, rather than prioritising company restructuring or even budget revenue. One example is the troubled chemicals sector, where a private company, Synthos, has offered to buy a state-owned fertiliser-maker for little more than the depressed stock exchange valuation. Another is ZE PAK. A media and telecoms tycoon, Zygmunt Solorz-Zak, already owns a minority stake in the company, and has been ceded day-to-day control. He agreed to give up his management rights in order to allow the company to list on the exchange, provided that he receives an option to increase his stake to a majority. This apparently determined attempt to raise cash for the budget masks an equally steely determination to keep important firms in Polish hands. All this leaves the Treasury selling firms at a cut price to local companies, or selling small stakes in the likes of PKO to raise money without giving up control. In the short term such actions might succeed in quelling the budget deficit. However, with Lotos, PKO and many other companies remaining firmly under state control, this privatisation drive will do little for corporate efficiency, or longer-term growth.

October 17, 2012 Arresting the slide?

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 20 With his popularity sliding in the polls amid a brutal austerity programme, the prime minister, Donald Tusk, offered voters a large investment programme on October 12th. Throwing billions at everything from new roads and railways to power plants will, he hopes, revive the slowing economy and his party's popularity. Accounting tricks mean that the investment will not be added to state debt, he says, and the moves fit well enough with recent IMF calls for euro zone countries to be more flexible over deficit-narrowing to boost growth. In the short term the move should help government stability, and at least avoid a threatened hit to growth while the country waits for the next round of EU infrastructure subsidies. However, with unemployment high, and measures to cut pensions and welfare spending deeply unpopular, it remains questionable whether enough is being done to make voters fonder of their prime minister—or to make a meaningful contribution to growth. Mr Tusk told parliament that there is "no other way for Poland" than sustaining growth through investment, adding that the money spent would not be added to public debt. He asserted that Poland has a real chance to maintain economic growth and make it translate into more jobs. Growth is the government's priority, and Mr Tusk pledges to find billions of zlotys to invest in large infrastructure projects, which have in the past boosted growth prospects. The government expects growth to slow to 2.1% in 2013 (half of the rate in 2011) as euro zone demand for exports wilts and unemployment above 12% helps to dent domestic demand. Plugging the gap The immediate concern is to plug the gap left by EU infrastructure subsidies, which have helped to fuel an infrastructure boom in recent years, especially in the run-up to the Euro 2012 football championships. Heavy spending on roads and sports stadiums (among many other things) has helped to sustain wider economic growth, but EU money has now been spent and the next round will not kick in for another two years. With fears that cash-strapped euro zone states will spend less freely on subsidies next time, Mr Tusk has to find another source of money. His talk of prioritising growth also fits with current euro zone thinking (although Poland has yet to join the single currency), with countries including Portugal and Spain given more time to narrow their deficits to avoid worsening their recessions. Christine Lagarde, the head of the IMF, recently called for more fiscal flexibility among euro area states that can still afford to raise debt. This is good news for Poland; in September the finance minister announced that the fiscal deficit will be much larger than the original 2.3% target for 2012. In terms of infrastructure spending, Mr Tusk identified few new targets, contenting himself with listing projects worth Zl 220bn (US$70.2bn), including motorways, rail modernisation, power plants and gas infrastructure. Most of these projects had been mentioned before. What was new was a plan to channel money through BGZ, a state-controlled bank, to keep the spending off the state balance sheet and away from public debt. Details were hazy, but the essential idea is to use the assets of state companies to create an off-budget investment fund that could lend up to Zl 40bn by 2015, bridging the gap until the EU's 2014-20 budget comes into force. Plenty of practical questions remain over this plan—for example, whether the investment will actually be treated as off-balance-sheet and whether BGZ will be able to leverage up the assets in a difficult market for borrowers. However, it is good politics, and reassuring for the markets. Mr Tusk said that all of the projects have to be "safe from the point of view of the deficit", suggesting that he will continue with his determined efforts to tame a fiscal gap that was just under 8% of GDP in 2010. At the moment, Poland's borrowing rates are low enough not to trouble the government, but that could change quickly if the markets perceive any weakening of the government's resolve to bring the deficit and public debt (which is nudging the level that triggers mandatory spending cuts) under control. Stimulus or remedial surgery? The real target of Mr Tusk's announcement was domestic public opinion, however. Large spending cuts and tax rises, high unemployment, bankruptcies running at a seven-year high and slowing growth are hurting the popularity of Mr Tusk's centre-right and economically liberal Civic Platform (PO). On September 29th tens of thousands of people marched in Warsaw to protest against joblessness, budget cuts and rising living costs. This was followed by a small demonstration by healthcare workers demanding wage increases on October 5th. Recent polls show that the conservative opposition Law and Justice (PiS) has overtaken the PO: the PiS enjoys support of around 40%, according to a recent poll by TNS Polska taken after Mr Tusk's speech, with the PO on 35%. After the speech Mr Tusk won a vote of confidence in his government, with his party continuing to enjoy a parliamentary majority in coalition with its junior partner, the Polish Peasants' Party. That helped to quell any fears of an immediate government collapse, and this announcement might help to ease fears that growth will crumble as infrastructure spending in the country dries up. However, there is little popular support for Mr Tusk's austerity measures, and little sign that announcing a way to fund some already announced infrastructure spending will do much to help his fragile popularity and that of his party.

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 21 October 25, 2012 Reaction to deeper euro zone integration from the "east" Poland's recent about-face to support European regulatory institutions like the European Commission-inspired banking union reaffirms the government's strategy of trying to become a key EU player and part of the European 'inner core'. The prime minister has defended the government's decision to participate in salvaging the single currency as an opportunity to gain influence in the decision-making processes within the euro zone. It will, he argues, prevent Poland from becoming a secondtier EU member—a risk because it is still outside the euro zone and has not yet attained the level of development of the EU's richest countries. However, the right-wing opposition continues to criticise the government for not representing Poland's interests effectively at the European level. Up until recently the Polish government had made it clear that it would not be joining the planned banking union, which will give the European Central Bank (ECB) supervisory power over all 6,000 banks in the euro zone, with a mechanism for non-euro countries to join on a voluntary basis. The finance minister, Jacek Rostowski, has publicly stated on several occasions over the past few weeks that it is not in Poland's interests to join a body in which it does not have a vote (Poland is not a euro zone member) while being subject to its decisions. However, the latest summit of European leaders, held in Brussels on October 18th-19th, heralded a change of heart, which also signifies a shift in Poland's bargaining tactics on core EU issues. Poland now appears to support the notion that the creation of a banking union could save the euro area. On the eve of the summit the president of the National Bank of Poland (NBP, the central bank), Marek Belka, announced that the creation of a banking union was essentially a good thing, even for countries like Poland that are outside the euro area. Horse-trading tactics, but concerns remain In return for backing the idea of a single banking supervisor, and ultimately a banking union, the government, led by Mr Tusk from the ruling Civic Platform (PO), hopes to secure a better deal for Poland at the EU level, and potentially also better terms for non-euro zone countries to join the new regulatory regime now being proposed. Poland, like neighbouring states such as Slovakia, is eager to ensure that the regulatory and legal framework for the new system (which is expected to be in place by the start of 2013) will protect the financial interests of the domestic banking sector. Of particular concern is how to prevent significant outflows of capital in domestic banking systems (which are otherwise highly liquid) to rescue parent companies abroad in distressed member states. Another significant concern is the flow of EU structural funds designated for eastern EU states in the new programming period covering 2014-20. Projects co-financed by EU funds have been an important source of economic growth in the current period, running up to 2013, and Poland wants to ensure a steady flow going forward. Nevertheless, Mr Tusk emerged from last week's summit satisfied with the assurances he had received on the EU budget for the forthcoming programming period. Fiscal union remains divisive Increasing budgetary surveillance by the EU over national budgets remains a politically divisive issue. While all parties in the political mainstream are concerned that core member states are assuming a greater leadership role within Europe and acting in a way that could potentially crowd out states like Poland in the future (hand in hand with deeper fiscal union), the PO-led government has made it clear that it favours closer German-led integration with the EU as the way for Poland to remain part of what it terms "Europe's mainstream". The government's stance on Europe and EU policies is broadly supported by its junior coalition partner, the agrarian Polish Peasants' Party (PSL), and largely endorsed by the two smaller left-wing opposition parties: Palikot's Movement (RP), an anti-clerical left-liberal party, and the communist successor Democratic Left Alliance (SLD). However, it has been strongly criticised by Poland's largest opposition grouping, the right-wing Law and Justice (PiS) party, led by Mr Tusk's predecessor, Jaroslaw Kaczynski. Poland is one of 25 EU countries that signed the European fiscal treaty aimed at tightening budget discipline within the euro zone. The PiS has argued that signing up to a fiscal treaty that gives Brussels more control over national budgets and finances is a threat to the country's sovereignty and independence. The PiS has also been critical of the government's decision to agree to offering financial assistance (via the IMF) to support euro zone countries that are at risk, but which have a higher standard of living than that enjoyed by Poland. While most Poles remain supportive of the EU in principle and want the country to have a decisive voice in Europe, they oppose Polish euro zone accession, and popular resolve has hardened on involvement in bail-outs of wealthier EU economies that face banking and sovereign debt crises. For instance, one survey, published by the CBOS polling agency in January 2012, found that only 32% of Poles are in favour of giving financial support to activities aimed at

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 22 fighting the crisis in the euro zone, by lending money to the IMF from NBP reserves, and 57% were against. Although there has been a small drop in the levels of support over the past couple of years, Poles remain overwhelmingly supportive of EU membership. This is likely to continue to be the case as long as Poles continue to have access to Western labour markets, and enjoy free travel throughout the Schengen zone; and as Poland continues to receive substantial regional aid from the EU budget in 2014-20. As part of its commitment to be seen to be at the centre of the EU's decision-making core, the Tusk government remains committed to Poland finding a "safe way" of joining a reformed euro zone, although this might mean having to forego some decision-making rights under the new banking union. However, it cannot do this before the two camps that have emerged in recent weeks—one in favour of a banking union, and the other a more conservative, cautious approach favoured by the leading opposition parties—have found a compromise. Poland will therefore need to find other ways of making its voice heard, particularly given that the allure of euro adoption has faded rapidly this year, as the debt crisis has continued to deepen, and leading politicians have continued to refuse to set an official date for adoption.

October 26, 2012 No thanks to nuclear? Poland, says the head of the country's largest power company, PGE, must choose between investing in shale gas exploration and funding a nuclear programme. Added to the marked failure by the prime minister to mention nuclear in his spending plans during a recent high-profile policy speech, speculation is mounting that the country could abandon its controversial plans to build a nuclear plant on the Baltic coast. The government is not yet saying that the plan has been scrapped, but the plant looks increasingly unnecessary, as well as unaffordable. A slowing economy means there is less need for extra generating capacity, while shale gas looks more of a policy priority as a way of weaning Poland off its reliance on gas imported from Russia. Officially, the nuclear plans are not dead; but they do look increasingly pointless. "These two programmes cannot be successful [at the same time]," PGE's chief executive, Krzysztof Kilian, said on October 24th, referring to the debate over shale gas and nuclear power. "You cannot drive on the left and on the right at the same time." PGE is a leading player in the consortium planning to build a nuclear-power plant expected to cost around Zl 50bn (US$15.7bn), as well as in joint ventures exploring for shale gas deposits (exploiting technology allowing gas to be extracted from rock layers previously too difficult to explore), which are also likely to cost around Zl 50bn. Unsurprisingly, perhaps, it seems to be saying that it cannot afford to do both of these things, and so the government needs to decide which one it wants. PGE refused to explain Mr Kilian's comments, but the businessman is close to Mr Tusk, and government officials have added to the impression that Poland is rethinking its nuclear plans. As well as Mr Tusk's failure to mention nuclear as part of his energy investment plans in a speech this month, the Treasury minister, Mikolaj Budzanowski, recently emphasised that the government's priority was shale gas, not nuclear. "Our priority is the exploration and production of hydrocarbons," he told the Polish parliament, later adding that a final decision on the nuclear plant would not be made until 2014-15. If it does prove to be a straight choice between the two, there is little doubt that the government will plump for the massive potential of shale gas. A report last year estimated that Polish shale deposits could satisfy the country's domestic gas requirements for the next 300 years, although a more recent report for the Polish government estimated the deposits at only 10% as high, showing the uncertainty that remains here. That is important politically as well as economically to the country, which urgently wants to escape its reliance on Russian gas—comprising 90% of the total used in Poland. Surprisingly unimportant The pricey nuclear plant is surprisingly unimportant by comparison, potentially fulfilling only about 2% of the country's electricity needs. It is also politically sensitive in a country hard hit by the 1980s Chernobyl nuclear disaster in Ukraine. An early post-communist attempt to build a nuclear-power plant in Poland was derailed by popular protests within the country. And Germany, among others, asked Poland to reconsider its nuclear plans last year following the Fukushima disaster in Japan. Mr Tusk continues to maintain that there is no great popular opposition to a nuclear plant these days, but equally there is little practical need to press ahead with the plans in the face of threatened popular and international opposition. Poland had decided to build a nuclear plant for two reasons, both of which have now been superseded. First, a fast- growing economy before the 2008-09 crisis meant that the country needed more generation capacity to avoid

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 23 blackouts from 2016. Slower growth has removed the threat, and Mr Budzanowski said recently that new investments, especially into shale gas extraction, could mean the country will be running an energy surplus from 2020. Poland no longer needs the extra generation capacity this plant would provide. The second reason for planning the nuclear plant was that Poland urgently needed to slash its carbon dioxide emissions to meet toughened EU pollution standards. The bulk of Polish electricity still comes from polluting coal- fired plants, and the country faces stiff penalties from Brussels if it doesn't cut the resulting pollution. However, it remains reluctant to ditch the coal plants, partly because of the huge cost this would entail, and partly because they support hundreds of thousands of local mining jobs. And it has found that it can buy carbon offsets over a European trading system cheaply enough to protect its smokestacks. It makes little sense financially for Poland to spend heavily on a nuclear plant to diversify away from coal production. For the same amount of money it can start to unlock shale gas deposits which could make the country self-sufficient in energy. All of which means it looks increasingly unlikely that Poland will press ahead with its controversial plans to build its first nuclear plant. That makes it part of a regional trend towards rejecting the nuclear option, with two-thirds of Lithuanians voting recently against building a new plant in a referendum, and several west European countries backing away from nuclear power subsequent to the Fukushima disaster. Whatever the pollution concerns, Poland's future, it seems, lies in coal and gas, not nuclear power.

Economy Forecast updates October 1, 2012: Policy trends Ministry of Finance will continue to tap financial markets Event On September 28th the Ministry of Finance announced that it expected to meet this year's borrowing needs in October, and that it would pre-finance 20% of 2013 borrowing requirements this year. Analysis Poland's official borrowing requirements for 2013 amount to Zl 145bn (US$45.6bn). The latest announcement highlights Poland's continued ability to tap the markets for affordable cash, in contrast to Hungary and struggling euro zone states such as Spain. However, the decision to pre-finance such a big proportion of next year's deficit needs also shows that the country remains nervous that any escalation in the euro zone crisis could make it impossible to raise market funding, with Poland heavily reliant on euro area trade and investment. Wojciech Kowalczyk, a deputy finance minister, said that Poland had already met 95% of its financing needs for this year, after taking advantage of positive market conditions. It should complete 2012 funding in October, and will aim to cover 20% of next year's funding requirements this year if market conditions remain favourable. This suggests forthcoming issues of Zl 29bn before the end of 2012. In 2011, Poland successfully covered 18% of its 2012 borrowing requirements. Poland might make further foreign-currency issues this year, with the ministry considering the Japanese market. It also wants to tap money from sources such as the World Bank and the European Investment Bank, and hopes to extend its US$30bn flexible credit line from the IMF. Polish bond yields have improved this year as the government launches an aggressive austerity drive to quell the budget deficit, and with widespread expectations that the central bank will lower interest rates soon. As a result, Polish bonds are seen as offering good rates of return with moderate risk. Foreign holdings of Polish bonds hit a record Zl 180bn in August and continued to grow in September, according to the finance ministry. The ministry also plans to issue significant amounts of bonds on foreign markets in order to take advantage of low yields. Impact on the forecast We continue to expect Poland to be able to fund its borrowing requirements over the market, although any escalation in the euro zone crisis could force it to seek help from the IMF or others.

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 24

October 1, 2012: Economic growth Falling core inflation makes cut in policy rate more likely Event The Monetary Policy Council (MPC) of the National Bank of Poland (NBP, the central bank) holds its next policymaking meeting on October 2nd-3rd. Recent data on core and net inflation has pointed to a sharper than expected slowdown in economic growth and a further weakening in inflationary pressures. Analysis Most external analysts expect the MPC to announce a rate cut this week. The NBP's net inflation measure, which strips out the effects of changes in the prices of food and energy, has fallen from 3.1% year on year in December 2011 to just 2.1% in August 2012. This suggests that although headline inflation was 3.8% in August—far above the MPC's mediumterm inflation target of 2.5%—domestic price pressures have weakened enough to bring future inflation below the official target. Supporting this trend is the recent fluctuation of the zloty, which has strengthened appreciably from its low point in December 2011, when it averaged Zl 4.48:€1 and Zl 3.40:US$1. At the end of September 2012, the zloty was trading at around Zl 4.11:€1 and Zl 3.18:US$1. By reducing the zloty value of Poland's foreign debt, the rise in the zloty makes it easier for the government to keep public debt below the mandated threshold level of 55% of GDP. It also reduces the impact of higher import prices on domestic inflation. The only factor suggesting that inflationary pressures could persist is the stubbornly high level of households' inflationary expectations, which stood at 4.1% in September, only slightly lower than the 4.4% recorded in August— this is much higher than is consistent with the NBP's inflation target. However, the inflationary expectations of consumers have recently seem to be more closely related to the recent level of consumer price inflation (which stood at 4%, the rate known to consumers in July when the latest NBP survey was taken) than they do to expected future rates of inflation. Impact on the forecast We expect a further loosening of monetary policy in the near term. However, more important than the prospects for inflation is whether or not a majority of MPC members will deem it too early for another policy rate cut, as the previous cut took place only in May.

October 3, 2012: Economic growth Deterioration in manufacturing performance Event The purchasing managers' index (PMI) for the manufacturing sector deteriorated further in September, to 48.0 in the Czech Republic (down from 48.7 in August) and 47.0 in Poland (down from 48.3 previously). Analysis The PMI for the Czech Republic and Poland are based on survey data compiled by Markit from over 200 manufacturing companies in both countries. The PMI threshold of 50 denotes the difference between growth and contraction. The latest PMI results for September suggest that the pace of decline in manufacturing output has accelerated, and that output has reached the lowest levels since the crisis of 2009. The deepening recession in the euro zone continued to squeeze external demand for Polish and Czech-manufactured goods in the third quarter of 2012: new orders fared particularly badly in September (declining for six months running in the Czech Republic), as did new export business. Employment in the manufacturing factor has also continued to fall in recent months, which reflects depressed purchasing activity by firms and a further depletion of inventories. Cost pressures are on the rise in the manufacturing sectors of both countries, broadly in line with an increase in prices of inputs, particularly of oil- and fuel-based products, following a price spike on international markets. The outlook for the manufacturing sector as a whole remains poor in both countries, especially given the limited prospects for a rebound in economic growth in the near term among core trading partners in the euro zone. The impact of the crisis on manufacturing now appears more evident in Poland than in the Czech Republic, where there was some stabilisation in the pace of declining new orders in September compared with the significant contractions recorded during the summer. A steeper decline in core segments of industry—as external demand from manufacturers in the EU continues to falter—is expected to pull down Czech and Polish manufacturing performance further in the fourth quarter of 2012. Impact on the forecast The latest PMI data reinforce our baseline forecast for a contraction in real GDP growth of 1% in the Czech Republic in 2012, alongside a significant slowdown in economic growth in Poland, to around 2.4%.

October 4, 2012: Monetary policy outlook Rates are unchanged, but are set to fall in November Event The MPC of the central bank left all official interest rates unchanged after its policy meeting on October 2nd-3rd. The key intervention rate therefore remains at 4.75%. This was against expectations: most local analysts had expected official rates to be cut. Analysis Speculation that interest rates would be cut had been encouraged by dovish remarks from Marek Belka, the central bank president and chair of the MPC, that an easing phase in monetary policy would start soon. In addition, Zyta Gilowska, one of the more hawkish members of the council, was absent from the rate-setting meeting because of illness. It is clear from the communiqué issued after the MPC's meeting and from Mr Belka's remarks at the press conference that the MPC still has doubts that inflationary pressures are weakening as quickly as most outside observers believe. In particular, the MPC appears to be putting more weight on the relatively high level of inflation (3.8 % in August) than on the much lower rate of "net" inflation (which excludes food and energy prices, and was 2.1% in August). In addition, many would have seen an early cut in rates as an implicit admission that the MPC's decision to raise rates in May had been a mistake. Central bank staff will present their updated forecast for inflation and economic growth to the MPC at its next meeting, on November 6th-7th. The new forecast is expected to give the MPC the cover that it requires to make the first cut in rates. With interest rates in the Czech Republic at record lows and the Hungarian central bank cutting rates more aggressively than previously expected, the MPC's more cautious stance will do little to ease the current slowdown in the Polish economy. However, it will tend to push the zloty higher, easing worries that public debt might rise above the critical level of 55% of GDP at the end of the year. Impact on the forecast Despite the MPC's caution, we continue to expect a reduction in official rates in November.

October 11, 2012: Economic growth Car production data send mixed signals for growth outlook Event The latest data from the automotive sector confirm that Slovakia remains the leader in the region in terms of car production levels, while Poland and the Czech Republic lag behind. Analysis Declining headline industrial production in the Czech Republic has been influenced by trends in the automotive sector. The pace of growth in the production of passenger vehicles (including light commercial vehicles) slowed to just over 2% year on year January-August 2012; and according to the Czech Car Importers Association, new car registrations declined by 6% year on year in the third quarter of 2012, to 36,826 units. This corresponds to a similar decline in the sale and repair of motor vehicles, which fell by 4.7% year on year in August. Car sales have been dragged down by poor demand for cars and related services, in line with weakening retail sales (which dropped by 0.8% in August) as the recession in the domestic economy deepens. Poland's auto industry has seen a similar—albeit more pronounced—decline in auto production: according to the latest data released by the Samar Research Institute, the production of passenger vehicles (including light commercial vehicles) dropped by 22.2% year on year in January-September, to 498,200 units. The local industry has struggled with declining sales and output since the relocation of several models from Polish plants to markets in core countries of the EU last year. Slovakia remains the leading market for buoyant car production growth. In September new car sales jumped up by 47% year on year, to 7,329 units. This, however, was largely due to the imposition of a new car registration fee (part of the government's fiscal consolidation drive), effective from October 1st. Combined with weakening external demand and the decision of leading car manufacturers to temporarily halt production, this is likely to contribute to a slowdown in car sales in the fourth quarter of 2012. Of the three, auto production is expected to continue driving headline economic growth in Slovakia, whereas the potential for significant growth in this market segment in Poland and the Czech Republic is less clear owing to the domestic factors at play—namely the extent of the slowdown in domestic demand—and direct exposure to the recession in the euro zone, which appears to be affecting Slovakia less as it has more successively diversified its car exports further afield, to Asian markets. Impact on the forecast The slowdown in the pace of car production output, in line with falling external demand from core trading partners in Europe, confirms our baseline forecast for a contraction in economic growth in the Czech Republic in 2012, alongside a more modest slowdown in headline real GDP growth in both Poland and Slovakia, as ongoing investment in these markets will offset the impact of weak euro zone demand.

October 16, 2012: Inflation Inflation in September is lower than expected Event The latest inflation figure was again lower than expected, adding to the pressure on the MPC to cut official interest rates at its next meeting. Analysis On October 15th the GUS announced that consumer prices rose by just 0.1% between August and September, leaving the year-on-year rate unchanged from 3.8% in August. The finance ministry and most independent commentators had been expecting annual inflation to rise to 3.9% or 4% in September. One of the main drivers of higher prices continues to be higher fuel prices. Transport fuel in September was 13% more expensive year on year. With the seasonal rise in prices of new ranges of clothing and footwear proving to be lower than expected, the widely watched measure of net inflation (excluding food and energy) looks to have fallen again. According to the finance ministry, net inflation in September was just 1.9%, down from 2.1% in August. Despite high world food prices, the ministry expects consumer price inflation to fall to less than 3% by end-2012, and a separate forecast from the economy ministry predicts that inflation will fall to 3.6% in October. The government has announced additional measures to support economic activity in 2013 following a speech in parliament by the prime minister on October 12th. With economic growth slowing sharply, it will become increasingly difficult for workers to demand wage increases and for firms to force through price increases, even if their fuel and other costs are rising. The MPC will receive the central bank's updated forecast for inflation and economic growth at its next meeting, on November 6th-7th. The latest inflation figures make it more likely that the new forecast will show inflation dropping to the MPC's target of 1.5-3.5% in the next few months. The central bank president and chair of the MPC has made it clear that he expects the MPC to cut interest rates in November. Impact on the forecast Our estimate for average inflation of 3.6% in 2012 will remain unchanged.

October 16, 2012: Fiscal policy outlook Donald Tusk's exposé signals looser fiscal policy Event On October 12th Donald Tusk delivered a keynote parliamentary speech setting out his government's main economic policy priorities for the next 12 months. Analysis The speech pledged to maintain the pace of economic growth, and was enough for the government to win the parliamentary confidence vote held on the same day. The speech repeated earlier commitments to continue with the programme of roadbuilding (which lost momentum after the end of Euro 2012 in June), to raise spending on scientific research and to modernise Poland's ageing electricity-generating capacity. The main new element was an announcement that future privatisation revenue would be used to boost the capital of the state-owned BGK bank to allow it to support large strategic investments. Financing investment in this way has the advantage that BGK's borrowings do not count as public-sector debt and therefore allows fiscal policy to be in effect relaxed without increasing public debt above the critical level of 55% of GDP. However, the diversion of privatisation revenue to BGK from its previous use of financing the state budget deficit will directly lead to increased government borrowing in 2014. The Treasury is still due to provide Zl 10bn (US$3.1bn) through a combination of dividends from state shareholdings and revenue from asset sales to the state budget in 2013. In so far as BGK's liabilities are guaranteed by the state, the new borrowing by the bank represents an increase in the state's contingent liabilities, which could eventually lead to an increase in measured public debt. Contrary to earlier expectations, Mr Tusk did not announce any change in tax policy. There was no shift in ZUS contributions from employees to employers, nor, despite calls from the trade unions, was there any move to impose ZUS charges on temporary and other "atypical" labour contracts. The only concession that Mr Tusk made to the trade unions was to announce that measures would be taken to ensure that high earners paid their share of ZUS contributions. Impact on the forecast The latest announcement by the government reinforces the likelihood of greater fiscal slippage in 2012. However, we still expect the budget deficit to narrow to 3% of GDP in 2013.

October 18, 2012: Economic growth Industrial output figures confirm sharp economic slowdown Event According to GUS figures, industrial output in September was much weaker than expected. Analysis Although headline industrial output rose by 6.1% between September and August, this was solely owing to seasonal factors. Allowing for these, industrial output dropped by 1.4%. Seasonally adjusted industrial output was 1.6% lower year on year. This is the first time that this indicator has declined year on year since September 2009, when industry was just emerging from the international financial crisis. The poor performance was broad-based, with 27 of the 34 industrial branches monitored by the GUS showing year-on- year falls in production. Reflecting the weakened state of the European car market and the poor relative performance of the main car firms producing in Poland (Fiat and General Motors), output of motor vehicles was 12.7% lower than a year earlier. Construction output was even weaker than industrial output, and continues to act as a drag on headline economic growth. Total construction output (seasonally adjusted) fell by 2% between August and September, and was 9.5% lower than in September 2011. The poor state of the construction sector reflects the fall-off in public investment spending since Euro 2012, in addition to the weakness in private capital spending as firms react to the increasing uncertainty about the economic outlook by holding back on investment plans. Although the weakness in the industrial sector should not be exaggerated—taking the third quarter as a whole, the level of industrial output was virtually unchanged from the second quarter—the latest figures provide further confirmation that economic growth is slowing sharply. This lends support to the government's intention, announced in Mr Tusk's recent exposé, to take action to boost investment spending. The latest figures also add to the increasing pressure on the MPC to cut interest rates at its next meeting, in early November. Impact on the forecast On the basis of the latest data, we are likely to revise down our estimate for industrial production growth in 2012.

October 19, 2012: External sector External deficit is gradually narrowing Event According to the latest figures from the National Bank of Poland (NBP, the central bank), in the 12 months to August the overall current-account deficit was Zl 63.5bn (US$19bn), around 4.1% of GDP, down from Zl 74.5bn, or 4.9% of GDP, in 2011 as a whole. Poland's external deficit continues to narrow gradually. Analysis Poland is still receiving a steady flow of transfers of capital from abroad (Zl 41bn in the 12 months to August). These, along with a steady net inflow of foreign direct investment (FDI), would normally be enough to cover the country's external financing needs. However, the NBP's balance-of-payments figures continue to show a significant (around 1.6% of GDP) outflow in the residual errors and omissions item. As a result, Poland needs to attract a steady inflow of more volatile forms of foreign capital (either portfolio capital or borrowing from foreign banks) in order to balance the external accounts. This inflow takes the form of foreign purchases of government bonds, seen as a "safe haven" from the troubles of the euro zone. This is partly offset by a net outflow on bank borrowing, as foreign banks seek to reduce net funding of their Polish subsidiaries in order to improve their own capital positions. The government's approach to privatisation, based on floating stakes in state-owned companies on the stock market rather than sales to strategic investors, is unlikely to boost FDI inflows. Poland will continue to rely on foreign purchases of its government bonds to cover its external deficit. This is not likely to pose any problems in the short term. In the longer term the interest payments required on these bonds will expand the already large deficit on the incomes component of the current account. In contrast to dividend payments on FDI, which can be reduced when economic conditions are unfavourable, interest payments on the government's debt are fixed in advance. This could cause problems if Poland's export performance were to deteriorate significantly in the future, either due to an escalation of the problems in the euro zone or because of unexpected problems in the Russian market, where Polish exports have recently been rising rapidly. Impact on the forecast On the basis of the latest data, our current forecast for a full-year current-account deficit equivalent to 3.8% of GDP will remain unchanged.

October 22, 2012: Monetary policy outlook Rate cut virtually certain at next MPC meeting Event The MPC unexpectedly left official interest rates unchanged at its meeting on October 2nd-3rd, but it is widely expected to cut rates at its next meeting, on November 6th-7th. Analysis The minutes of the meeting, published on October 18th, confirm reports that there was strong support within the council to cut rates. However, motions to reduce the key official interest rate by 50 basis points and 25 basis points were defeated. The voting results will be released in mid-November, but it is likely that more MPC members voted for lower rates than at the meeting in September. The MPC is convinced that economic growth is slowing and that internal inflationary pressures are weakening. Opinions differ on how persistent the economic downturn will be and on the extent of the threat to domestic inflation from global commodity prices. The more hawkish members of the MPC saw the policy easing carried out by the world's main central banks in September as having a significant effect in supporting economic activity, especially in the euro zone. This would help to maintain economic growth in Poland, but would also keep commodity prices high. Others argued that slower growth in the main emerging markets would lead to a reduction in externally driven price rises, allowing headline inflation to fall. Marek Belka, the central bank president and MPC chair, is in favour of lower interest rates. Furthermore, Adam Glapinski, a noted hawk on the committee, has toned down his recent comments, declaring that he will vote to cut rates if the central bank's new economic forecast (which will be available to the MPC at its next meeting) shows inflation falling below the 2.5% target and the economy slowing sharply. The next forecast is due in March 2013. Impact on the forecast Given that economic developments have generally pointed to slower economic growth and weakening inflationary pressures since the central bank's most recent macroeconomic forecast, we continue to expect the MPC to announce an interest rate cut in November, and believe that this is likely to usher in a cycle of monetary easing lasting well into the first half of 2013.

October 22, 2012: Policy trends Central Europe mulls Samurai bonds to broaden funding Event Officials from several central European countries, including Poland and Slovakia, have met investors in Tokyo in recent weeks to discuss issuing bonds in Japan. Analysis This move reflects the need of central European countries to widen their funding base as European markets remain shallow, and Japanese investors' increasing appetite for debt from the region as they turn away from euro zone countries whose credit rating has been cut over the past year. Poland in particular suggests that Asian countries could become a useful additional source of debt financing for a region worried that the euro zone debt crisis could result in a dearth of appetite for its bond issues, both corporate and sovereign. Representatives from countries including Poland, the Czech Republic and Latvia met Japanese investors at the IMF/World Bank meeting in Tokyo on October 12th-14th. A Czech government official said that a Japanese issue might make sense for the country's sovereign debt mix, and a Slovak official said that the country might test the yen market in 2013. Poland, Latvia and perhaps Croatia are also reportedly mulling issues in Japan. Fears of the euro zone crisis, and the downgrading of the credit rating of some large countries including France, have left Japanese buyers looking for new countries to invest in. Some central European countries, such as the Czech Republic and the slightly lower-rated Poland, enjoy sufficiently good credit ratings to be acceptable to Japanese buyers looking for a safe alternative to west European debt. Others, such as Latvia and Croatia, are only just investment-grade rated, but offer buyers a much higher interest rate than more stable euro zone states. Central European countries are eagerly eyeing Japan's growing interest in buying their debt issues, with interest from EU buyers limited since the euro zone crisis began. The main player is Poland, which launched a successful ¥25bn (US$313m) issue in May. It is looking at issuing three- and five-year bonds to institutional investors. Impact on the forecast We continue to expect central European states to attract affordable market funding in the near term, which should help to satisfy official borrowing requirements comfortably in 2013.

October 24, 2012: Economic growth Labour market continues to soften Event The latest labour market indicators confirm that the economic slowdown is continuing. Measures of business and consumer sentiment weakened further in October, adding to pressure on the central bank to cut interest rates at its next meeting. Analysis According to the GUS, registered unemployment at end-September was 14,300 higher than a month earlier (seasonally unadjusted). Although the unemployment rate remained at 12.4% of the labour force, the rate of increase quickened again. The year-on-year increase in unemployment was 8,000 in March, 81,000 in June and 117,000 in September. Other labour market indicators paint a more mixed picture: the level of employment in larger firms was broadly unchanged from a year earlier. More new vacancies were announced in September than a year earlier, but the level of redundancies also rose. All of this is consistent with a further slowdown in economic growth in the third quarter, but not a fall into recession. However, the gradual deterioration in the labour market, coupled with further falls in real wages, is depressing consumer confidence. According to the monthly survey carried out by the GUS and the central bank, households' views of their current economic situation worsened further in October, and they are now more pessimistic than during the worst of the international financial crisis in 2009. This is reflected in the sharp weakening in retail sales in September. The GUS's measure of retail sales volumes was 0.4% lower year on year—a dramatic slowdown from growth of more than 8% in the first quarter. Added to this is the collapse of confidence in construction, where businesses are more pessimistic than at any time in the past 12 years. This does much to explain the emphasis that the prime minister put on supporting physical investment in his recent exposé of the government's economic policy for 2013. With industrial firms also becoming more pessimistic about their prospects, pressure is building on the central bank to support the economy by cutting interest rates significantly at the MPC's meeting on November 6th-7th. Impact on the forecast The data reinforce our estimate for a slowdown in economic growth in 2012.

October 31, 2012: Policy trends Polish growth helps bond yields fall below Czech levels Event In October Polish euro borrowing costs fell below Czech borrowing costs for the first time, as markets applauded the Polish government's efforts to promote growth, and fretted about political instability in the Czech Republic. Analysis On October 15th Bloomberg reported that the yields on Polish ten-year euro bonds (often regarded as a proxy for government borrowing costs) fell to 1 basis point below the yields of the Czech equivalent. This was the first time since the fall of communism in 1989 that Polish borrowing costs had fallen below the Czech Republic's, reflecting a marked shift in investor confidence: two months previously, Polish euro bonds had commanded a premium of 47 basis points over their Czech equivalent. Investor sentiment has shifted towards Poland's growing economy since the country's prime minister, Donald Tusk, unveiled a spending package designed to boost growth (the socalled "exposé" delivered before parliament)—despite the threat to an ambitious austerity programme aiming to tame a fiscal deficit that hit 7.8% of GDP in 2010. On October 12th Mr Tusk unveiled plans to spend US$95bn on upgrading infrastructure in the period to 2020, in a bid to boost slowing growth. He said that this money would not be added to public debt, or the budget deficit, but had already admitted that his government would miss its target of reducing the deficit to little more than 3% of GDP this year. The Polish economy continues to grow—by an annual 2.3% in the second quarter, although expectations for growth in the third quarter are more modest—in contrast to the Czech economy, which has contracted for the past three quarters. The Polish recipe for growth, the figures suggest, is preferred by the markets to the rigorous focus on austerity in the Czech Republic, where measures to narrow the deficit have helped to drive the economy into recession and to destabilise the government. The Czech government now faces a revolt from lawmakers against planned tax rises. Low debt and relatively low deficit levels mean that the Czech Republic continues to enjoy a slightly better credit rating than Poland, however, and significantly lower local-currency borrowing costs. Impact on the forecast We continue to expect both the Czech Republic and Poland to be able to access affordable market funding. However, Poland's falling borrowing costs, and its mild relaxation of austerity measures, could increase the pressure on the Czech government to ease the pace of austerity in favour of more aggressive growth policies.

Analysis October 24, 2012 There are continued improvements in ease of doing business The World Bank's Doing Business 2013 is the tenth in a series of annual reports that investigate business regulations worldwide. Regulations across ten categories in 185 economies in 2011/12 are measured: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. As in some previous years, several east European countries feature prominently in the list of top reformers. The region is now second only to the developed OECD according to its average ease of doing business ranking. The attractiveness of the World Bank measures is that the indicators are objective (rather than reflecting perceptions) —for example, the number of administrative procedures, the costs relative to income, time spent on various administrative tasks. The data are comparable across countries and many of the aspects covered are seemingly easy to implement; in some cases all that is required is the stroke of a minister's pen. The World Bank's overall ease of doing business ranking is calculated as the ranking on the simple average of country percentile rankings on each of the ten categories that are covered. The ranking on each category is the simple average of the percentile rankings on the component indicators. However, the measure does not amount to a measure of the overall business environment. It does not account for a

Country Report November 2012 www.eiu.com © Economist Intelligence Unit Limited 2012 Poland 36 country's market potential, infrastructure, strength of institutions, security of property, or macroeconomic and political stability. Regulation and institutions In principle, the indicators of regulation (what the state does) are distinct from deep underlying institutions (how strong or capable the state is). Doing Business covers both types of indicators: indicators relating to the strength of legal institutions relevant to business regulation and indicators relating to the complexity and cost of regulatory processes. The first group focuses on the legal and regulatory framework for getting credit, protecting investors, enforcing contracts and resolving insolvency. The second focuses on the cost and efficiency of regulatory processes for starting a business, dealing with construction permits, getting electricity, registering property, paying taxes and trading across borders. To ease restrictions on business, a country seemingly does not need to be wealthy or have very well developed institutions. Nevertheless, economies that rank highly on the ease of doing business tend to combine efficient regulatory processes with strong legal institutions that protect property and investor rights. OECD high-income economies have on average, by a large margin, the most business-friendly regulatory environment on both dimensions. The relationship between wealth and ease of doing business is not airtight: some poor countries do better than could be inferred from their level of development, and some rich countries do not perform that well. Eastern Europe's record As in some previous years, several east European countries feature prominently in the list of top reformers, based on changes in regulations over the past year. Five east European economies were among the ten economies improving the most across three or more categories: Poland (registering property, paying taxes, enforcing contracts, resolving insolvency), Ukraine (starting a business, registering property, paying taxes), Uzbekistan (starting a business, getting credit, trading across borders, resolving insolvency), Serbia (starting a business, enforcing contracts, resolving insolvency), Kazakhstan (starting a business, getting credit, resolving insolvency). As in some recent years, in the past year eastern Europe had the largest share of economies registering improvements, with 88% of economies implementing at least one institutional or regulatory reform making it easier to do business and 67% implementing at least two. This region has been consistently active through all the years covered by Doing Business, implementing 397 institutional and regulatory reforms since 2005. Georgia is the top improver since 2005 both in eastern Europe and globally. With 35 institutional and regulatory reforms since 2005, Georgia has improved in all areas. In the past year alone it improved in six areas. However, changes in a single year can be misleading, especially if the starting point is from a low level. For example, the overall ranks on the ease of doing business for most east European countries are still relatively low despite the favourable trend in recent years. Only in Georgia has the change been deep and persistent enough over time for the reform level to change dramatically; it is the only east European country in the top ten for the overall ease of doing business (ranked ninth). Estonia is ranked 21st. Macedonia, which has also been among the top reformers in recent years, is ranked 23rd. Next from the region come Latvia (25th), Lithuania (27th), Armenia (32nd) and Slovenia (34th). Still, eastern Europe overtook East Asia as the second most business-friendly region (after the developed OECD). Although eastern Europe's average rank still lags far behind that of the high-income OECD countries, a few of the region's economies surpass some west European countries, and other economies in the region compare favourably with leading emerging markets. How important is it? In previous reports, the World Bank has made some strong claims as to payback of deregulation in terms of spurring economic growth. Some estimates of an enormous impact seem implausible, and the post-2008 financial crisis affected some of the leading reformers badly, according to the Word Bank ease of doing business measure, casting doubt on some of the claims of a strong association between the ease of doing business and growth. Nevertheless, it is likely that there is a positive association. In the Economist Intelligence Unit's long-term growth model, a statistically significant link between growth and an index of regulation (reflecting seven business environment indicators for labour, credit and product markets regulation) is identified.