PolandBusiness and economic outlook

Quarterly update – July 2015by Dr Daniel Thorniley

Contents

• Executive summary• CEE and Poland looking good in the world• Regional long-term GDP outlook • CEE overview• Why has CEE improved in the last two years?• Why does the Polish economy perform better than its peers? • The good news and some worries• Business issues• Business outlook• Economic outlook• What about the Swiss franc? • Inflation outlook • Currency outlook and interest rates • Statistical table

Executive summary (1)

• Core Central Europe will grow this year 6-8 times faster than Latin America!• Poland is a big part of this story and is one of the best performing “emerging markets”

in the world reporting the best figures in 6 years• In fact Poland is the star of the European growth performance• Poland combines the growth of an emerging market with the volume of a developed

one• The consensus for 2015 GDP growth is one of the best in Europe at 3.6%• The Polish GDP growth story also looks sustainable• The economic rally has lasted almost two years now after starting in about spring 2013• The Ukraine crisis and Russian recession have only taken about 0.15% off CEE growth • The Eurozone is also recovering and will grow by 1.5% this year: lower oil prices, a

weaker Euro and the introduction of QE will spur the CEE region • When the Eurozone grows an extra 1%, then the CEE region adds an extra 1.3%• Poland is a tight, competitive market but it remains one of the key-3 markets in the CEE

region with Russia and Turkey• It is also very much a single-digit sales growth market, definitely mature

Executive summary (2)

• But one should not get too over-excited, Poland/CEE markets have all the usual and intrinsic business challenges including a challenging regulatory environment

• Regional CEE mangers are facing more demands from global headquarters to ratchet up sales and especially profits to compensate for the weaker big markets

• EU funds help: CEE markets are able this year to spend the EU structural funds from the last period up to 2013 and also start to allocate funds from the current period of 2014-2020;

• In mid-2014 Poland was allocated 77bn Euros of funds under the European Structural and Investment Fund programme which includes 50bn Euros for under-developed regions. Poland was allotted the largest amount in the CEE region given its economic size and population

• The core CEE cluster of Hungary, Poland, Czech, Slovakia and Romania now represents a solid business cluster to compensate in part for the slowdown in Russia, Ukraine and Turkey

• The timing of this core CEE rally could hardly have been better for regional CEE/Ceemea managers as Russia, Ukraine slumped

• The Big-3 markets of the CEE region were and to a large extent still are: Russia, Turkey, Poland. Currently Poland looks the most resilient and sustainable of these

• Within the greater CEE region, Poland has usually accounted for 22-26% of regional business when Russia accounted for 35-45%

Executive summary (3)

• Polish GDP results and trends look like the strongest they have been in decades; the economy is in a sweet spot and the rally is broad-based in manufacturing, industry, investment, trade, consumption and government consumption….. Not bad!

• Noticeably Poland looks like out-performing Russia for the short and even medium-term • The sudden surge in the value of the Swiss franc will cause some bank and consumption

problems in 2015 but we do not yet think these are insurmountable• GDP growth averaged 3.4% in 2014 and will reach 3.6% this year and then trend close to this

number for 3-4 more years performing better than all CEE markets and perhaps only matched by Romania which has more room for convergence and catch-up

• Fixed investment and industrial output this year will range about 5-6% and in 2015-19• Household spending stabilises this year at around 3.3% and just over 3% in next 3-4 years• Consumer confidence has improved steadily and persistently over recent years and is now in

June 2015 at -12 close to a 6-year best level • Prices remain deflationary at -0.4% this year and creep up to just below +2% in 2016-19• Solid growth is not bringing higher prices, so interest rates will not rise: we were therefore not

surprised when the Monetary Policy Council cut rates in March by 0.5% to 1.5% as deflation went deeper

Executive summary (4)

• Low inflation means very high real wages at 3.5% to 4.5% which are some of the best in Europe and the world this year and next

• Future growth comes from consumer spending, investment (EU funds) and less from exports

• Trade (especially exports) has survived well in recent years at an average 5-7% and while we see some softening this year, a Eurozone mini-rally may suck in more Polish products

• Bank credits are driving the economy with a high average increase of 4-6% • The budget deficit turned positive in 2014 thanks purely to the transfer of private pension

funds to the state coffers. This will return to normal next year and the “real” budget deficit will hover below the EU threshold of -3% in 2015-16

• Our latest Survey, Poland now ranks second after Russia as priority market in the CEE region for the next 3-5 years with 44% of respondents ranking it thus

• Still, western sales in Poland are very much single digit but this is a large volume market • Poland is the same as other CEE markets….except it’s different!• The Polish market is bigger and more complex with more opportunities and challenges• And it has been less of a roller-coaster one than other CEE markets over the last 5-7 years

CEE and Poland looking good in the world

• CEE and other regions comparative GDP growth

2014 2015 2016Core CEE region 3.0 3.4 3.3South East Europe 1.6 2,2 2,6West Europe (including UK) 1.3 1.7 1.8USA 2.2 2.6 2,7Latin America 1.2 0.4 1.9Asia pacific 4.6 4.7 4.9

Sources: Consensus Economics, Ceemea Business Group, IMF

• The comparative numbers speak for themselves with the core CEE region growing faster than any region in the world with the exception of Asia pacific.

Regional long-term GDP outlook

• And for how long will the good times continue? • The consensus for solid growth for the CEE markets is actually quite strong and sustained

over the next 5-7 years

Average annual GDP growth by period 2010-2013 2014-2018 2019-2023Hungary 0.4 2.6 2.2Poland 3.4 3.5 3.0Czech Republic 1.1 2.6 2.3Slovakia 2.5 2.9 2.7Romania 0.9 3.0 3.0

Source: Ceemea Business Group

• Given likely low growth in the Eurozone of 1.8% average over the next 7 years and with Russia's GDP medium-term outlook at about 2.7 to 3.0%, these numbers are solid. Once again, when taken as a cluster, they do look a bit like a growth engine

The CEE outlook (1)

• Core CEE is growing at 8 times faster than the GDP of Latin America!• Poland is one of the best performing transitional markets in the world• Consumer confidence in Hungary and Czech Republic over the last 20 months have

seen some of the best improvements in the world and in Europe• When the Eurozone grows an extra 1%, then the CEE region grows an extra 1.3%• Core CEE went through a very tough 5 year period from 2009 to May 2013 • Business executives were certainly disappointed and despondent with the region• Hungary and Czech Republic were slumped in recession or sub-par growth just 2-3

years ago • More companies are putting more focus on core CEE region. • But talking with regional managers, Russia, Turkey and Poland remain the Big-3. The

pick-up in core CE will not compensate entirely for the slowdown in the Big-3 • South-east Europe is still under-performing with recovery likely only in 2016-17• We have taken Romania “out of the Balkans”! based on solid trends

The CEE outlook (2)

• Unfortunately we cannot say this for SEE markets and Slovenia and Croatia and the smaller ones are still struggling; they’re about 10-18 months behind core CEE

• The key point to make is that the economic numbers are improving but this does not automatically mean that business results are therefore booming immediately

• These core CEE markets are mature, transitioned markets (although they do retain regions which are still emerging)

• The core CEE region will remain a more mature single digit sales market for most firms and we see this trend in 2015 and this is the outlook for the coming years

• But we can confirm that more companies than ever report a mild/steady uptake• One US major conglomerate reports organic top-line sales growing at 8-10% and as the

regional managing director notes: “for such markets, this is very sizeable and helps buttress other slower markets in the EMEA region”.

Why has core CEE improved in the last 2 years?

1. Improvement in Eurozone just noted: low oil price helps disposable consumer spending on non-energy items , low inflation helps real wages, weak Euro helps exports and quantitative easing will help stock markets and property sectors

2. Bank credits are flowing a better even f for a while in 2009-10 the banking sector did look like a weak link but the worst was soon over and new credit emission is rising 2-4% which is quite decent and in Poland such new credits are rising at 4-6%, close to record levels.

3. Several CEE governments are imposing softer austerity programs on their economies 4. Inflation (or deflation)n is extremely low in all the CEE markets 5. This allows the central banks in the region to keep interest rates at record low levels

which in turn kicks back and stimulates the investment and production outlook.6. But low inflation (or deflation) is very important in stimulating real wages (i.e. salary

after inflation): some nominal wages are rising ell given the demand for labour as economies expand. But even in economies where nominal wages are for example just +1%, then if inflation is negative at say -1%, then real wages are positive by 2%. The combination of some increase in nominal ages across a back-drop of very low inflation is boosting consumer confidence and household spending

Why has core CEE improved in the last 2 years?

• There are several key reasons for the turnaround:• As we noted above, one axiom is that when the Eurozone grows by an extra 1%, then

the CEE region grows by an extra 1.3% • And in 2014 the Eurozone added an extra 1.5% and this year may well add another

0.7% growth to the 2014 figure • The rally in the Eurozone is the key driver for CEE exports, investment and industrial

output • But from mid-2014 we also started to see a positive contamination from exports and

investment into consumer spending which has usually been the weak link in these markets

• Unfortunately unemployment was slower to recuperate but even these stubbornly negative figures have started to improve across the region from late 2014 (in Hungary, thanks to government programs unemployment tumbled more quickly and earlier)

Why does the Polish market perform better than its peers?

Poland has outperformed the other core CEE market (even in the 2013 downturn) for several reasons:1.Poland has a large domestic economy 2.It is less dependent on external trade with the proportion of GDP emanating from trade at only 33% in Poland compared with 72% in Slovakia, 70% in Hungary and 60% in the Czech Republic. When global and Eurozone trade has slumped, being less dependent on trade had been a big positive for Poland3.The government has been much less obsessed with austerity measures than other CEE markets4.The banking sector and loan profile is stronger and the Central Bank has been reasonably aggressive in cutting interest rates to support GDP growth. The authorities are also eliminating certain restrictions on consumer lending 5.Remittances from abroad have been very strong although they have slowed6.Polish companies are sitting on cash and are relatively profitable 7.Inflation has fallen sharply in recent quarters 8.The Central Bank is ready to intervene to protect the zloty at around 4.30

The good news and some worries (1)

In the following table we compare some selected indicators at the start of 2013 (January) with numbers for 2014 and then February/March 2015 and May June 2015 (the numbers are year-on-year i.e. comparing the month(s) in 2014 with the same month/period in 2013 etc). Percentage change unless stated otherwise:

*See notes following

Jan 2013 May/June 2014

Nov/Dec 2014

Feb/Mar 2015

May/June 2015

Retail sales 0 3.8 -0.2 -1.3 +1.8Consumer confidence -3 -17 -12 -16 -12Business confidence -12 6.9 -2.5 6.3 6.1Industrial output -10 4.4 0.3 4.9 2.8PMI 48 50.8 53 54 54Inflation 2 0.2 -1 -1.6 -0.8Unemployment 13 12.5 11.7 11.7 10.4

The good news and some worries (2)

Notes to the table•First of all, there is a lot of good news and most indicators remain at good/solid levels •We would probably expect retail sales to be doing better than they are: this year they have fluctuated widely and averaged a mere 0.6% growth but were up +1.8% in May•Given such strong real wages, falling unemployment and better consumer confidence, we only presume that they will rally through the year to average at least 2-3%•Consumer confidence at -12 is at a 6-year record level•Business confidence is also close to a 5-year high level at 6.1 in June•But industrial production is a bit more volatile ranging from +8.8% in March to “just” +2.8% but it is averaging 5% growth through the first 5 months of 2015•As exports flow to the Eurozone, we think there is upside in the second half of the year•Additionally the PMI has stayed very strong at 54 in June 2015 and has been at this high average level through all of 2014-15 after a bad slump for most of 2011-13 when the figure was weak and below a level of 50•After averaging 13-14% for the last 5 years, unemployment is finally coming down and is close to a recent record low level of 10.4% in June

Business issues (1)

• The business outlook is for a competitive, single-digit growth market in 2014-2016 • Business has fared reasonably well in Poland in recent years compared with other CEE and

European markets but we underline again the competitive nature of the market• Poland is the same as other CEE markets…but different• It is a bigger market than the other CEE ones and therefore has more geographic scope and

options for affordable innovation, different marketing and sales strategies: does the Warsaw business strategy work in south-eastern Poland, do you want to try to get to “rural consumers”, does Poland meet one price approach, how complex is customer segmentation in Poland, how does this all affect route to market or do you use one “standardised Warsaw model” for the whole country? Lots of issues which do differentiate the Polish market.

• As expected, Poland ranks average to low for companies planning to make cuts in sales and marketing spending (just 7%) which is even lower than the figure 6 months ago

• The number of companies planning to reduce headcount has also decreased over the last 6 months from 16% in December to 10% in June 2015. Conversely a large 20% do plan to increase their staff numbers (the second best total in the region behind Russia) so there is some churn going on and different trends across sectors

• These features suggest that while the Polish market is stabilising, it is doing so at good levels and companies need to structure their operation accordingly

Business issues (2)

• As might be expected, Poland ranks very mid-table when it comes to changing route to market as this feature is already so mature for most: but 17% of companies do plan changes and these are probably firms which plan to extend and expand their operations with more of their own distribution or amending existing relations with suppliers, always with an eye to something expansionary or innovative

• Only 2% of firms report problems with receivables in Poland which places it at the very bottom (good) end of the table. Cash management techniques are mature and the supply chain is buoyant and well-financed

• But downtrading is a constant feature of business: much of his has already happened and Poland ranks mid-table in the CEE region in June 2015, with 27% of companies reporting downtrading with this more prevalent among consumer goods firms and food/beverages

• The reason that this number is not worse is that the market has already gone a long way in downtrading and price wars. As one regional FMCG director states: “Polish retail is brutal, tougher than Germany and that says a lot!”

• Price wars, margin pressures and downtrading to cheaper brands will continue, although sales are likely to steadily improve in 2015

Business outlook (1)

• Poland used to rank in 2-3 position in the total CEE region in terms of rate of sales’ growth invariably behind the more “converging” markets of Russia and Turkey

• But with Russia trending downwards for the next 12 months or more, companies will divert more attention to other key markets such as Turkey and to some extent Poland

• Other markets are “catching up” and now Poland ranks only No 12 out of 23 markets• But this is a change in relativities and does not reflect a major downturn in Poland• The market is a solid single-digit one: the upside is that 20% of firms forecast high-single

digits this year with 16% planning double-digit growth • Again when we combine the large volume of sales with these growth figures and compare

them with others in the CEE regional and across Europe, the picture is positive• As one regional director of one of the Top-10 global FMCG companies commented in

Vienna: “Poland is getting impressive. It’s still a very hard market with all the features of tough western retail BUT it now has a bit better growth than almost anywhere”.

• We repeat that the current maintained rally will not translate into booming business rather it will be upside, on a big, steady, competitive market

• This year almost 60% of companies predict single-digit sales growth with another 12% expecting flat sales after a solid 2014; some 12% forecast negative sales this year

Business outlook (2)

• The profit outlook mirrors the sales trend• In 2016 the picture actually improves with fewer companies budgeting for negative or flat

sales (3% and 4% respectively)• Those forecasting single digits jumps to 78% with 14% planning for double-digit sales• So the numbers are solid and steady and reflect the good economic/business news of the

last two years but it is still mainly a single-digit sales market • That said, in terms of rate of sales growth in consumer products Poland ranks only

mid/bottom-table in 2015 because 20% of companies plan flat growth or negative growth this year with all others (88%) lumped into single digits (mostly low-single digits)

• Given real wages growth and rising bank credits, this figure should actually be a little conservative; and we see this in the fact that in 2016 all CP companies are clustered in single digits (100%) spread evenly over low and high-single digits which is not bad for such a mature market

• The B2B sector in 2015 is comparatively strong on the back of good investment and industrial figures and Poland ranks 6th in this sector with no company expecting negative growth or flat sales in 2015 (and that is a strong highlight for this sector) while 85% forecast single digits and 15% predict double digits

Business outlook (3)

• 2016 for B2B sales sees stabilisation with 100% of respondents budgeting for single digits and most of those in low-single digits

• The fairly good results for 2015-16 are supported by domestic bank financing and EU-related co-financed projects which are still giving a positive boost to the economy

• The Polish IT sector is “not bad” but of course again very tight on price: some 80% forecast low-single digit growth in 2015 with the reminder looking at high single digits. Interestingly no company budgets for flat or negative growth and so some sort of mini-rally is going on here

• The IT industry has been a bit counter-cyclical and entered the recession late as companies and consumers stocked up on efficiency-inducing IT products in 2009-10 and parts of 2011 but the sector hit a partial brick wall from about early 2012

• In pharmaceuticals and health Poland ranks mid-table in our Survey with a very even spread of companies reporting flat, single digits and low-double digits and as in other markets much depends on market share and whether you supply to government, private sector or OTC

• Next year there is a marginal improvement with fewer companies forecasting flat sales (17%) and a similar number (18%) predicting low-double digits

PolandLatest forecasts: revenue and profit results by sector, 2015

From our June 2015 survey

PolandLatest forecasts: revenue and profit results by sector, 2016

From our June 2015 survey

Economic outlook (1)

• Famously, Poland was the only major European economy which did not dip into recession in 2009 and it then posted a couple of good years in 2010 and 2011 when GDP growth averaged 4.2%. But then the Eurozone crisis and global jitters pulled growth down to an average of 1.8% in 2012-13

• But low inflation, low interest rates, rising wages, stronger consumer confidence, steady-good exports and very strong investment and industrial output which in turn reduce unemployment all combine to boost the economy last year, this year and in 2017-20

• The several factors we alluded to above will now ensure GDP growth this year of 3.6% with a good sustainable and steady/strong outlook of 3.4% in the coming years

• Poland has the potential to be the biggest and one of the best growing economies in the region and could be set to record a faster rate of growth than Russia for the next 4-7 years

• Another key element has been the government’s reluctance to engage in austerity measures adopted by other Eurozone and CEE regimes to their detriment

• The government has given itself some extra “fiscal space” by part-nationalising the private pension fund assets which allows for public sector spending (in this election year) to rise by about 3% compared with 2.7% in 2014

Economic outlook (2)

• After wobbling at the end of 2014 given regional volatility and the Russian rouble collapse, business confidence declined but bounced back at the start of 2015

• Since then it has recovered and stabilised at close to record levels of 6.1 in June this year• The steady industrial/investment outlook is supported by the very strong PMI number of

54 over the last 18 months compared with a more vulnerable figure below 50 for most of

2011-13. The PMI figure improved along with GDP from the start of 2014 • Investment levels picked up very strongly last year at 9.2% and we think that investment

and industry will grow 5-6% this year (2015) and in the mid-term • So far this year monthly industrial output numbers have fluctuated quite bit from 8.8%

growth in March to “just” 2.8% in May• But we think that average industrial output will average about 5% this year helped by

solid exports and trade figures also rising 5-6% this year, close to last year's figure• The on-going rally in the Eurozone and Poland’s many and sophisticated supply chains

into the EU will help buttress trade and overall investment • Low (negative) inflation, strong real wages (+4%) and solid new bank credits (at 4-6%

expansion) all add to the positive picture

Economic outlook (3)

• Steady trends in trade are also helping the current account deficit which is under good control and fell from levels of -3% to -4% in 2011-12 to -1.3% last year

• We expect he current account to improve a bit more this year to -0.4% and then to drift back to about -1% or slightly worse in 2016-19 which is perfectly fine and manageable

• Given this is an election year (autumn), we presume that the government will boost spending and benefits and government spending will tick up to about 3% this year

• After the shock defeat in the presidential elections, there is a rising chance that the current administration of Civic Platform could be ousted by the Law and Justice Party

• While we think that “political risk” is very limited, any Law and Justice regime might be more pro-growth and for more social spending but again we question whether any new government would take Poland out of it’s “sweet spot”

• Bank credits used to be a hindrance and a weak spot for all CEE markets; Poland was often best in class but at levels too weak to drive sustainable growth

• But for more than a year now overall new bank credits have accelerated from a “not bad” level of 2-3% expansion to a best-in-class of 4-6% with some recent deceleration

• These new credits also serve as a stimulus for consumer spending • The banks are doing their job and it shows

Economic outlook (4) – Consumer spending

• Consumer spending was strong at an average of 4.2% growth in 2010-11 but then softened to an average 1.0% in 2012 and 2013. As with other indicators, consumer spending rallied last year to 3.1% and will be higher again at 3.4% this year and averaging 3.2% in 2016-19

• Rising employment, falling unemployment, more bank credits and especially much stronger real wages on the back of deflation will all buttress household spending this year and for subsequent years

• The positive mood has filtered through from other parts of the economy to consumers and thanks also to government policy (not austerity fixated) and the Central Bank’s approach of ensuring that interest rates are not excessively high: loose money has helped the economy

• Consumer confidence was -30 in January 2013 and ranged weakly at -30 to -20 for much of 2010-13. This improved to -15 in 2014 and to -16 in the first quarter of 2015 and to a recent record level of -12 in June

• Retail sales varied from 5-10% growth in 2010-11 and then stabilised at 3-4.5% in 2012-14. retail sales have been a bit mixed so far this year and not really reflected the other positive drivers in the economy: they averaged + 0.5% in the first 5 months and were growing at 1.8% in May

Economic outlook (5) – Consumer spending

• Given all the positive consumer factors, we expect retail sales to rally in the second half of the year and to reach +3% average for 2015 and to record a similar figure in 2016-19

• The negative impact of the Swiss franc seems largely to have been absorbed• Deflation and/or weak price rises are boosting real wages: as recently as 2012 these were

negative but were already not bad at all in 2013 at 1.6% growth• But with inflation flat last year and nominal wages up about 3.6%, then real wages

jumped last year by a similar 3.6% • In 2015 we see nominal wages at 4-5% with inflation negative, so again real wages will be

rising 4-5%. For example with a negative inflation number in June of -0.8%, real wages rose in that month above 5%, one of the very best levels in Europe and indeed the world!

• Real wages will be supportive of consumer spending for several years although as inflation rises moderately in the next 2-3 years, so too real wages will come down to 2-3% range which remain good

• Unemployment has been Poland's weak link but is getting better: unemployment was still a high 13% just 17 months ago but fell to recent low of 10.4% in June 2015. We see both job creation expanding and unemployment coming down in the next 18 months

What about the Swiss franc?

• The elevated Swiss franc is bad news for CEE banks and non-preforming loans as well as for consumers especially those directly impacted (holding Swiss franc mortgage loans)

• Poland does look the most exposed for Swiss franc loans but even here the exposure has lessened in recent years: from a big 60% among all loans in 2009 to a recent lower figure of 22% of retail loans and 15% of all loans in November 2014

• But about 32% of “household debt” including mortgages is denominated in Swiss francs• Put another way, some 30bn Euros of mortgages are reported to be Swiss-franc based• Only 3.5% of Polish mortgages are in arrears and with well-funded banks and good

capital adequacy levels, Polish banks ought to be able to ride out the storm• Debts and mortgage payments were helped in recent months, and will be in 2015, by

low interest rates and this is one compensation to the spiking Swiss• Presumably the government and National Bank will sit down to discuss methods to ease

the pain for households faced with 20% mortgage payment increases• Approximately 500,000 households face surging mortgage repayments and this could

harm consumer confidence and spending patterns (at the margins) • But we do not think that at the moment this will cause severe rupture to the GDP

outlook or even consumer spending levels, except at the margins

Inflation outlook (1)

• Poland is following and matching deflationary/low inflation trends as in the rest of the CEE region (excluding CIS)

• We do expect with the consensus that prices will rise moderately over the next 15 months and that process is underway at low levels

• Inflation is low for all the standard reasons: energy costs are now low, food prices are weak thanks to a good harvest and food prices are generally lower than usual as exports to Russia are re-directed back into Poland or other CEE/EU markets; the zloty is steady against the Euro so there is no inflationary push from the currency as import prices are low (-2.3% in 2015); Eurozone prices are also very low; prices are generally very competitive in the “Germanised” retail market with downtrading a common feature

• As a result of all this, prices turned negative in July 2014 where they have remained negative for one year with average 2014 inflation at precisely zero.

• Prices then touched a low of -1.6% in February and were -0.8% in June and we expect inflation to average -0.4% this year but then inflation will tick up moderately

Inflation outlook (2)

• Retail fuel prices and farmers’ market prices started to creep from March • Importantly the low base effects from last year’s collapsed oil price will start to filter out of

the numbers this autumn as will low food prices and prices will pick up• The so-called output gap is not small but diminishing so there was room for non-inflationary

growth but as this indicator shrinks further this year, then so too will inflation rise • Energy prices have also ticked up from their late autumn 2014 lows and when that is

combined with the change in base effects, we expect inflation to turn positive in September-October

• We thus see prices rising in 2016 by an average of 1.7% and then with low inflation across most of Europe and competitive retailing, we see moderate inflation in subsequent years averaging at very most at 2%

• The Monetary Policy Committee cut the key rate to 1.5% in March having held the rate at 2% since last October. The Committee made an unambiguous statement that there would be no further easing in the near-term. But given current deflation and given the change in composition of the Committee’s personnel in early 2016, we share the consensus view that rates could be on holding pattern of “wait and see” for the next 12 months

• We could see a total of 0.5% rate increases in the second half of 2016

Currency and interest rate outlook

• There is no/very little currency risk with the zloty• It has fluctuated versus the Euro from mid-2012 to end-2014 in a range of 4.10 to 4.25 • The zloty strengthened against the Euro at the start of 2015 (to 4.0) thanks to Eurozone

QE and we think that in medium term further Eurozone QE will support the zloty• But in recent weeks the zloty has dipped down to 4.20 given Greek volatility and some

reaction to perceived political risk after the spring presidential election result • Medium-term we presume some zloty strength or stability given good growth outlook,

low inflation, improved current account and further QE in the Eurozone and thus an average rate of 4.08 in 2015 and trending to 4.0 to 3.9 between 2016 and 2018

• The zloty ranged at 3.00 to 3.25 versus the US dollar in 2012-to mid 2014 but then fell against the strong “greenback” from 3.23 last July to 3.80 in July 2015, a fall of 17% which is far from unusual compared with other currencies; as US interest rates rise later this year, then so too the zloty could fall a bit further against the dollar in line with other emerging market currencies but we do not envisage any collapse

• We see an average dollar-Euro rate this year of 1.10 and then to average 1.05 in 2016-17• Given the zloty stability with the Euro, the Polish currency will probably move in line

with the Euro versus the dollar and presumably downwards a bit in the next 1-3 years

Poland - forecast table

2012 2013 2014 2015 2016 2017 2018 2019GDP 2.0 1.6 3.3 3.6 3.6 3.5 3.4 3.3Fixed investment -1.7 1.1 9.2 6.1 5.6 5.2 4.9 4.4Industrial output 0.5 1.8 3.5 4.6 5.4 5.4 5.2 5.0Household spending 1.2 1.1 3.1 3.4 3.3 3.1 2.8 2.8Government spending 0.1 2.0 2.4 2.9 2.5 2.4 2.1 1.9Real wages -0.2 2.0 3.6 4.6 2.7 2.0 2.0 1.6Consumer prices (average) 3.7 0.9 0.0 -0.4 1.7 2.0 1.8 1.8Budget deficit (% of GDP) -3.9 -4.0 4.5* -2.9 -2.8 -2.9 -2.7 -2.7Current account (% of GDP) -3.5 -1.4 -1.3 -0.4 -0.9 -1.5 -1.8 -2.5Exports 3.8 6.5 6.8 6.0 5.9 5.0 4.5 4.8Imports -1.7 3.5 6.1 5.5 5.5 4.6 4.3 4.4Zloty/Euro, average 4.19 4.20 4.18 4.08 4.00 3.93 3.90 3.88Unemployment (%) 12.8 13.5 12.2 11.3 10.2 9.8 9.4 10.3

Notes: Real annual % change unless stated* The budget suddenly moves into a surplus in 2014 because of the one-off transfer of private pension funds to the state fund. Without the transfer, the underlying deficit is around 3.6%

Disclaimer, copyright, sources

© 2015 CEEMEA Business Group*

CEEMEA Business Group currently works with senior leaders of over 400 large multinational companies operating in the Central Eastern Europe, Middle East and Africa regions, helping them understand economic and business outlooks globally, regionally and at country levels. Regional and global executives also receive regular advice and updates on best practices for expansion and success in emerging markets. Executive members of the CEEMEA Business Group can also attend regular peer group meetings held throughout Europe and in Dubai. Source: DT-Global Business Consulting GmbH and CEEMEA Business Group researchBasic data sources come from central banks, own intelligence network, CEEMEA Business Group corporate survey, governments and other public sources. Interpretation, views, forecasts, business quotes and business outlooks by DT-Global Business Consulting GmbH and CEEMEA Business Group.

This material is provided for information purposes only. It is not a recommendation or advice of any investment or commercial activity whatsoever. The CEEMEA Business Group accepts no liability for any commercial losses incurred by any party acting on information in these materials.

Contact: Dr Daniel Thorniley, President, DT-Global Business Consulting GmbHM: +43 676 534 685 / E: danielthorniley@dt-gbc.com / W: www.ceemeabusinessgroup.com

*a joint venture betweenDT-Global Business Consulting GmbH, Address: Keinergasse 8/33, 1030 Vienna, Austria,Company registration: FN 331137t and GSA Global Success Advisors GmbH, Hoffeldstraße 1, 2522 Oberwaltersdorf, AustriaCompany registration: FN 331082k