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May 1, champagne, and what?

Poland after the EU Accession 26 November, 2004 Mats Olausson Chief Strategist Emerging Markets mats.olausson@seb.se +46-8 506 232 62. May 1, champagne, and what? . What’s new since 1 May Customs procedures Trade barriers Direct payments to farmers Psychology Exports

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May 1, champagne, and what?

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  1. Polandafter the EU Accession26 November, 2004Mats OlaussonChief StrategistEmerging Marketsmats.olausson@seb.se+46-8 506 232 62

  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 2003. 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 (1.5-3.5%) • 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

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