Poland Business Forecast Report Q4 2008

Slower Growth To Come

As we expected, the Polish economy notched up a solid rate of growth during the first quarter. We previously highlighted that despite the deterioration in the external environment, the strength of domestic demand would shield the economy from adverse developments in global markets. This view has played out well, with real GDP growth coming in at 6.1% y-o-y in Q108, slightly down from the 6.4% growth of the previous quarter, though nonetheless a healthy outturn. We hold to our view, however, that the deterioration in the eurozone's economic outlook, combined with cooling domestic demand, will see Polish economic growth slow this year. In particular, we believe that the front loading of hikes to the National Bank of Poland's reference rate, will start to weigh on domestic consumption and investment during H208. Beyond 2008 we believe that household consumption and investment will remain the main drivers of economic growth over our five-year forecast period, though maintain that we are unlikely to see a recovery in domestic demand until 2011 as the post-boom economy cools.

Following two presidential vetoes in as many months, relations have soured further between Polish Prime Minister Donald Tusk and President Lech Kaczynski. Tusk's Civic Platform (PO) - led coalition government only commands 240 seats out of the 460 seat Sejm, short of the two-thirds majority required to override a presidential veto. Given that relations between Kaczynski and Tusk have remained tense following the latter's ousting of Jaroslaw Kaczynski as Prime Minister in 2007, we believe the President will likely intervene further in the passage of new legislation. Indeed, as Kaczynski's term in office is due to end in 2010, significant reforms to domestic markets and public services may be delayed over the medium term.

The strong demand for credit among Poland's private sector, combined with a relatively upbeat economic outlook amid deteriorating eurozone macroeconomic fundamentals, has seen the stock of gross external debt continue to swell during the first quarter. Indeed, still buoyant domestic demand during the first quarter and high degree of political and economic stability have kept the door to external finance open. The volume of external debt expanded by 26.3% y-o-y during Q108 (to total EUR168.9bn) - an acceleration from the 22.3% growth in Q407 and 16.3% in Q107. We hold to our view that the debt pile will continue to expand over our five-year forecast period - both in nominal and percentage of GDP terms. We forecast gross external debt as percentage of GDP reaching 52.4% in 2008, climbing slightly to 54.1% by 2012.

Polish Energy Partners (PEP), a major clean-energy producer in Poland, has announced plans to have 700MW of wind power generation on line by 2012. Poland has so far invested heavily in developing its geo-thermal sector. The country also has considerable wind power potential and will have to utilise this vital energy source if it is to keep up with the EU's green drive. Poland is making steady progress in the development of its renewables sector. The country has thus far developed its hydropower capabilities, and is also utilising its geo-thermal resources. BMI has been carefully charting the expansion of Poland's renewable sector. In June 2008, construction began on Poland's first geo-thermal heat and power plant in Uniejow. The country already has six geo-thermal plants - used for heat - in operation, but the latest plant demonstrates Poland's willingness to develop its renewable power sector.