Poland after the EU Accession 26 November, 2004 Mats Olausson Chief StrategistEmerging Markets Poland after the EU Accession 26 November, 2004 Mats Olausson Chief Strategist Emerging Markets

2 May 1, champagne, and what? What’s new since 1 May Customs procedures Trade barriers Direct payments to farmers Psychology Exports Further trade integration Investments Sentiment, real interest rate, output gap, EU-funds Growth Higher, broader Inflation EU harmonisation, food, oil, weak exchange rate Risk of second round effects ”The race for the euro” 3 countries in ERM 2. Public finances the stumbling block. SGP changes ?

3 Poland: Past the peak Exceeding expectations Broadening growth But unemployment remains high Net exports turn negative in 2005 Investments take over, but remain disappointing despite high capacity utilisation rising profits lower corporate income tax GDP growth slows from 5.6% this year to 4.7% and 4.3% next two years Still, that is above potential growth

4 Poland: Structural problems Negative public savings crowd out private investment Employment ratio (only 51% compared to 64% in EU) Bureaucracy, corruption Labour market inflexibility Agricultural sector Infrastructure Ownership

5 Poland: Public finances are weak 2004 deficit will come in below target. But the target was set very high despite high growth and CPI More ambitious fiscal target 2005 Eurostat rules against Poland Deficit will be revised up by 1.5-2% Debt/GDP up by 3-4% Debt/GDP is on a rising trend Maastricht is still far away Changes to SGP? Burden to tighten falls on next government

6 Poland: Temporary rise in inflation CPI above target ( %) Food, oil and hiked regulated prices ahead of EU-accession. One-offs More hawkish central bank has hiked by 125bps to 6.5% Core inflation remains around 2.5% CPI to rise in 1Q but ease back in 2Q towards the upper end of the band Stronger zloty helps One more hike during 1Q Neutral real interest rate 4%

7 Poland: Strong zloty Undervalued vs. PPS Lower ULC REER lags neighbours Stronger current account Supporting portfolio flow Lower political risk premium Tighter monetary policy Neg. seasonals in Feb-Mar Focus shifting from PLN vs. basket and USD to EUR/PLN We expect the zloty to strengthen further to 4.10