1. Prospects for the Polish economy Lars Rasmussen Analyst, New Europe Research Danske Research, Danske Bank + 45 45 12 85 34 (direct) + 45 20 55 27 98 (mobile) laras@danskebank.dk www.danskebank.com/danskeresearch April 2008

2. 2 Outlook for the Polish economy in coming three years Wage growth has accelerated sharply over the last couple of years after a prolonged period of high economic growth. This has contributed to higher inflationary pressures and reduced competitiveness – see page 3 First signs of a slow down is becoming visible in data, but Poland will in general weather the global credit storm, due its strong fundamentals. We however expect that growth has peaked in 2007, and that it under every circumstances will shift from fifth to fourth gear during 2008-2010 as private demand eases somewhat. We however do not expect any major downturns, but we see real GDP growth slowing from the current rates around 6% y/y to roughly 4.5%-5% y/y by year-end. Hereafter should GDP expansion stabilise around 5% y/y in 2009-2010 – see page 4 A strong labour market continue to support private consumption, but tighter credit conditions, higher inflation and a peak in the property market should gradually begin to weigh on private consumption and hence growth – see page 5. Investment growth, another key driver behind the economic expansion is getting close to a peak – construction activity is key – see page 6 Polish exports continue to be driven by especially strong German growth. However the expected slowdown in the German economy will weigh on Polish exports – see page 7 Inflation has breached the official 2½% (+-1%) target zone driven by strong wage growth, but primarily the surge in food and energy prices. We tough expect to see a peak in Q3 2008. Then inflation should start to decline below 3% y/y in the following quarters, if food and energy prices stabilise – see page 8. Slower economic growth should also limit inflationary pressures in the Polish economy. This could pave the way some monetary easing in 2009-2010, but do not expect to much, as the central bank has proven fairly hawkish We could see further appreciation of the polish zloty in Q2-Q3 2008, as higher rates and yields attract speculative capital flows, and as the growth outlook in Poland looks fairly robust. Going in to 2009-2010 we believe that EUR/PLN will remain fairly stable – see page 9 and 10

3. 3 Wage growth continue to accelerate Wage growth is now showing clear signs of picking up and should accelerate further in during the rest of the year due to a tighter labour market and rising food and energy prices The accelerating wage growth is beginning to pose a potential inflationary problem, and it will have a limiting effect on longer term growth prospects

4. 4 First signs of growth slowing? Growth remains very strong– primarily driven by strong investment growth But, the rising difference between GDP growth and industrial production indicates that net exports is contributing less to growth Thus, deceleration in industrial production growth may show some moderate signs of slowing due to capacity constraints We expect that the Polish GDP growth will continue to slow below 6.0% y/y in the coming quarters Until now there have been very few signs of slowdown in the Polish economy, but is likely to change over the summer

5. 5 Private consumption boom Private consumption has accelerated strongly. However, the savings ratio is fairly low in Poland and that could pose a long-term threat to private consumption growth We are also worried that foreign currency funding might come under pressures and hit the Polish consumer Tighter credit conditions and more restrictive credit policies in the commercial banks will – in combination with higher inflation – weigh negatively on private consumption in 2008

6. 6 Investment growth close to a peak Investment growth has accelerated strongly since the beginning of 2002 The continued pick-up in demand, stronger investor sentiment and EU membership have boosted investment growth That said, we are probably getting close to a peak for investment growth, as global credit concerns and tighter monetary conditions could begin to weigh on Polish investment growth The property market is probably very close to a peak so construction activity is likely to slowdown in 2008 Euro2012 could help investment activity in 2009-2010, but not 2008

7. 7 Strong German economy helps Polish exports – but for how long? The German ifo index is defying gravity and has risen again in February and March The survey is not coming down as fast as expected and hence paints a more robust picture of the German economy than others We, however, expect a slowdown in the German economy in the coming quarters – that could weigh on Polish exports Polish competitiveness will gradually weaken in the coming year due to higher wage growth and a fairly strong zloty - but this should not be a major concern

8. 8 Rising inflation will push Polish rates higher Both Polish inflation and wage growth have risen significantly in 2008 and inflation remains well above the Polish central bank’s (NBP) inflation target of 2½% y/y. For the third consecutive month the Polish central bank (NBP) has hiked its key policy rate by 25bp, thereby bringing it to 5.75%. We expect that NBP will deliver two more hikes during Q2 before going on hold for most of H2 2008. This should bring its leading rate to 6.25% We expect that inflation will peak in Q3 2008 and then begin to decline, thereby bringing it back within the official range target zone Going into 2009, we could see a less hawkish stance from the central bank, as the economic activity cools a little, which should reduce some of the inflationary pressures. If food and energy prices stabilise this could pave the way for some easing through 2009-2010

9. 9 FX outlook Key drivers of the zloty: Economic growth Relative interest rates vs. US and Euroland The political situation The valuation of the zloty The zloty seems a bit expensive given the recent appreciation of PLN against EUR. But fundamentals also look strong - especially compared to other countries in the region We think that PLN could have further to go during Q2 2008, if the central bank continues to bring up its key rate, but clearly the upside potential over the coming years have become more limited. On the other hand we do not expect any large negative correction in PLN neither

10. 10 PLN pretty close to fair value

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