1

The impact of the recent crisis The impact of the recent crisis on the Polishon the Polish economy economy

and the response of the National Bank of Polandand the response of the National Bank of Poland

Zbigniew Hockuba

Member of the Board

National Bank of Poland

Challenges and Prospects of South East European Economies in the wake of the financial crisisAthens, October 16, 2009

2

With GDP growth of 1.1% in Q2 09, Poland is a bright spot in recession-hit Europe

3

Limited direct impact of the crisis on the Polish economy...

• Relatively strong GDP growth so far (6.8% in 2007 and 4.9% in 2008 and 1.1% in Q2 2009) and an above-zero forecast for 2009.

• Relatively balanced economy– CA deficit of 2,7% (4-quarter average until Q2 2009) financed

safely by FDI’s, loans from mother companies and trade credit• Relatively good situation of the banking sector

– capital adequacy ratio of 12.9% as of July 2009– low ratio of financial assets to GDP (roughly 1,04 in Poland

compared to CEE average of 1,23 and 4,36 in the euro area);– no securitization;– no exposure to high-risk assets connected to the sub-prime

sector• The crisis that hit Poland in September 2008 was mainly a crisis

of confidence in the banking sector, imported from global financial markets

4

Despite significant slowdown, GDP growth in Poland remains positive…

2,4

1,21,0

0,5 0,60,9

1,92,2

2,4

4,04,2

4,7

6,9

6,0

4,8

4,0

2,4

3,2

4,3 4,4

5,4

6,36,6 6,6

7,5

6,6 6,6 6,6

6,15,9

5,0

2,9

1,10,8

0

1

2

3

4

5

6

7

8

2001 2002 2003 2004 2005 2006 2007 2008 2009

5

…which distinguishes us from other European economies

GDP growth (y-o-y, %)

-10

-8-6

-4-2

02

46

8

2008 2009Q1 2009Q2 2009f

%

EU BG CZ HU PL RO SK

6

In September 2008 Poland suffered a sudden outflow of portfolio capital from the stock market and the

government debt market (to a lesser extent)

-3 000

-2 500

-2 000

-1 500

-1 000

-500

0

500

1 000

1 500

2 000

Jan-

07

Apr-0

7

Jul-0

7

Oct-

07

Jan-

08

Apr-0

8

Jul-0

8

Oct-

08

Jan-

09

Apr-0

9

Net purchasesof stocks bynonresidents(PLN million)

40

45

50

55

60

65

70

75

80

85

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Foreign holdings of Polish government debt(PLN billion)

7

The outflow of portfolio capital was coupled by a fall in FDI…

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

Mar

-04

Sep-0

4

Mar

-05

Sep-0

5

Mar

-06

Sep-0

6

Mar

-07

Sep-0

7

Mar

-08

Sep-0

8

Mar

-09

Inflow of FDI(PLN mln)

8

… and strong exchange rate depreciation

EUR/PLN

3,0

3,2

3,4

3,6

3,8

4,0

4,2

4,4

4,6

4,8

5,012

-200

3

6-20

04

12-2

004

6-20

05

12-2

005

6-20

06

12-2

006

6-20

07

12-2

007

6-20

08

12-2

008

6-20

09

Increasedenotes

depreciation

9

The exchange rate acted as a shock-absorber changing the structure of domestic demand

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2006

Q1

2006

Q2

2006

Q3

2006

Q4

2007

Q1

2007

Q2

2007

Q3

2007

Q4

2008

Q1

2008

Q2

2008

Q3

2008

Q4

2009

Q1

2009

Q2

Demand for goods produced in Poland

Demand for goods produced abroad

Domestic demand - total

Even though total demand is falling, demand for goods and services produced domestically rises, leading to a positive contribution of net exports to GDP growth

-6

-4

-2

0

2

4

6

8

10

12

per cent

Net exportsInventoriesGross fixed capital formationTotal consumptionGDP

10

-150

-100

-50

0

50

100

150

200

250

300

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Margins in CHF/PLNswaps

basis points

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Households

Corporates

May

-09

But, during financial turmoil, floating exchange rate also raises concerns about banks’ and households open

FX positions

The ratio of FX-denomintated loans to total loans

11

0

10

20

30

40

50

60

70

Jun-

07

Aug

-07

Oct

-07

Dec

-07

Feb

-08

Apr

-08

Jun-

08

Aug

-08

Oct

-08

Dec

-08

Feb

-09

Apr

-09

Jun-

09

PLN bln

Long-termliabilities

Short-termliabilities

Banking sector risks were mitigated by funding from foreign parent banks as well as FX swaps and repos

provided by the National Bank of Poland

-5

0

5

10

15

20

Jan

08

Ma

r 0

8

Ma

y 0

8

Jul 0

8

Se

p 0

8

No

v 0

8

Jan

09

Ma

r 0

9

Ma

y 0

9

Jul 0

9

PLN bln

FX swap

Liquidityprovidingrepos

Nonresident interbank funding NBP’s „confidence package” funding

12

Credit risk related to FX-denominated mortgages has not materialized so far

Even though households have less FX assets than liabilities – i.e. run open FX positions – mortgages denominated in foreign currencies have the best repayment performance in banks' loan portfolio.

2007 2008 III 2009 VI 2009Loans to households 4,10% 3,50% 3,80% 4,20% Housing loans 1,20% 1,00% 1,10% 1,20% - PLN denominated 1,70% 2,00% 2,20% 2,30% - FX denominated 0,70% 0,60% 0,70% 0,80% Consumer loans 6,60% 6,60% 7,30% 8,00%Loans to corporates 6,90% 6,20% 7,90% 10,00%

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The NBP responded also by cutting interest rates (from 6% in September to 3.5% in September’09)

Interest rate cuts together with longer-term refinancing operations conducted as part of the "Confidence Package" contributed to the fall of 3M interbank rates indexing the cost of credit in the economy.

%

2%

3%

4%

5%

6%

7%

8%

8-20

08

9-20

08

10-2

008

11-2

008

12-2

008

1-20

09

2-20

09

3-20

09

4-20

09

5-20

09

6-20

09

7-20

09

8-20

09

POLONIA WIBOR3M Stopa referencyjnaReference rate

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Lessons learned

• The financial crisis draws attention to the risks inherent in FX lending and – more importantly – to the build up of currency mismatches on banks' balance sheets. – In Poland such mismatches were hedged with the resort to off-balance

sheet instruments (e.g. FX swaps), but when the market dried up, the NBP had to step in.

• The crisis has tested the viability of both fixed and floating exchange rate regimes.

• Floating exchange provided considerable relief for the Polish economy as an automatic stabiliser– in good times, it limited the purchasing power of foreign currencies

through appreciation, probably slowing down the growth in asset prices;– in bad times, it renders Polish exports more attractive through rapid

depreciation and thus provides the much-needed stimulus to the economy.

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The way forward…

• NBP expects positive growth of the Polish economy both in 2009 and 2010.

• In 2010 a significant drop in inflation is forecasted• At the same time current account deficit will improve

in 2009 and probably decline in 2010 as growth of import recovers faster than growth of export

• Due to lagged recovery of the labour market unemplyment rate may further rise.

• Policies to address the increasing government deficit and debt will be necessary