Poland Today Business Review+ No. 56 by Poland Today Business Review+

1 year subscription: EUR 690 (PLN 2760) Newsletter Editor: Lech Kaczanowski lech.kaczanowski@poland-today.pl tel. +48 607 079 547 Sales Contact: James Anderson-Hanney james.anderson-hanney@poland-today.pl

No. 056 / 13th October 2014 / www.poland-today.pl / magazine, conferences, portal, newsletter

MANUFACTURING & PROCESSING Appliance producer FagorMastercook to be sold via negotiations after tender attracts no bidders page 3

25 YEARS OF TRANSFORMATION New ways of doing things: Poland Today talks to Adam Purwin, CEO of PKP Cargo page 8

Sharp sells Toruń TV plant to Slovakian contract manufacturer UMC page 3

Business, transformed: Poland Today takes a look at how various sectors of the Polish economy have changed over the past 25 years in the run-up to its Poland Transformed Business Awards Gala page 10

PROPERTY & CONSTRUCTION Warsaw developers betting on public institutions to fill up new office buildings page 4

The project cost more than PLN 200m and created in excess of 500 jobs.

Image: Drutex

Massive window plant opens in Poland

Polish company Drutex has opened Europe's largest PVC window factory in the northern town of Bytów. With a daily output of 10,000 windows and its own fleet of 200 delivery vehicles, the site supplies customers from all over Europe. page 2

Interest rates down to new record low

With an unusual asymmetrical cut, Poland's monetary policymakers have significantly reduced the cost of credit, hoping to stimulate Poland's weaker than expected economic growth. page 4

tel. +48 881 650 600

RETAILERS Polish fashion giant LPP speeds up expansion in Germany page 6 RETAIL PROPERTIES Polish Gemini Holding to build large shopping center in Tychy page 6 FOOD Ferrero expands Polish confectionery plant page 7 SPORTS Poland beats Germany in football for first time ever page 7

OPINION Healthy confidence or dangerous complacency? The Polish economy through the prism of the real estate industry page 13 KEY FIGURES Up-to-date macroeconomic figures, currency & stock market data and lots of other hard-to-find info pages 14-16

weekly newsletter # 056 / 13th October 2014 / page 2

MANUFACTURING & PROCESSING

Polish Drutex opens opens Europe's largest PVC window plant

dows as well as five lines that produce insulated glazing and another five that coat window panes with foil. The company is currently laying the groundwork for phase two of the project (ca. 30,000 sq.m), the construction of which is to begin next year.

From humble beginnings to No. 2 in EU Exports of windows & doors from Poland in EUR m

Polish company Drutex has completed its flagship investment - Europe's largest PVC windows factory - in Bytów (80km west of Gdańsk). Developed at the cost of PLN 200m, the European Center for Windows and Doors, as the facility is officially called, will enable Drutex to double its production capacity from 5,000 to 10,000 windows a day, and exceed 2m units per annum. The project will create approximately 500-700 new jobs, raising Drutex's headcount by approximately 20%.

1,200 1,000 800 600 400 200 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: GUS, CAB

The construction of Drutex's new plant began in January 2013. Unlike many of its competitors, the company makes both PVC profiles as well as insulated glazing, supplying a complete product to end customers via its own fleet of more than 200 trucks. According to Drutex, its one-stop-shop approach enables it to fulfill most of its European orders in less than a week. Besides PVC windows, the new plant will manufacture blinds, boosting the company's output in this product category from 3,000 units a month to 1,000 units a day, as well as industrial gates. With the new PLN 200m investment, Polish Drutex consolidates its position as Poland's largest producer of PVC windows. Photo: Multi

The newly completed phase one of the Drutex project includes a production building of 28,500 sq.m equipped in 32 production lines for doors and win-

With 2013 revenues of more than PLN 470m Drutex is already Poland's largest PVC window maker (the number two player, Oknoplast, turned over PLN 450m) and the Bytów project will only strengthen its leading position. Another major player in the sector, the Zambrów-based Dobroplast, with annual reve-

nues in the region of PLN 300m, attracted a major foreign investor, Switzerland's AFG last year. According to market research firm Centrum Analiz Branżowych, Poland-based companies made 5.5m windows and 3.7m doors in the first half of 2014, corresponding to the respective y/y increases of 15% and 11%. The full-year improvement is expected to reach 10% in the case of windows and 8% for doors. Window exports are likely to total 5.6m units. Over the past years Poland has emerged into Europe's number two exporter of PVC windows. Back in 2004, when the country joined the European Union, Poland's window & door exports totaled EUR 315m. By 2011 the figure came to EUR 900m and last year it stood at EUR 1.15bn. Germany remains number one in Europe with exports at EUR 1.6bn. Sales to foreign clients generate the bulk of revenues for companies like Drutex (70%) or Oknoplast, which has a network of 500 sales agents in Italy, as well as strong presence in Germany and France. Drutex ships its windows even to North America and Australia.

The new Drutex plant includes 32 production lines for doors and windows as well as 10 for insulated glazing & glass coating. Photo: Drutex

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After learning the ropes of the trade from German manufacturers, Polish companies have made the country's western neighbor their key market with 1.4m units sold to Germany last year alone. They are using the same machinery and technologies as western manufactures, but with Poland's considerably lower labor costs they are able to offer much better prices. After noticing the sector's potential, the Polish authorities have decided to incorporate windows and doors in government-sponsored exports promotion programs.

The collapse of FagorMastercook Wrocław follows the bankruptcy of its Spanish parent Fagor Electrodomésticos. The company was hit hard by slumping consumer demand and had been scrambling to secure financing to continue operations and pay down a debt of EUR 850m. Fagor acquired the Wrocław business (then known as Wrozamet) in 2002 where it has since been producing a range of white goods (ovens, hobs, hoods, dishwashers, washing machines, and fridges) under three brands: Mastercook, De Dietrich, and Fagor.

MANUFACTURING & PROCESSING

Appliance producer FagorMastercook to be sold via negotiations after tender attracts no bidders After nobody showed up for the tender to acquire the Wrocław-based white goods producer FagorMastercook, the firm's creditors gave the court-appointed receiver green light to enter price negotiations with any interested parties. The minimum price in the tender had been set at PLN 270m, which the potential buyers clearly found as too steep. Meanwhile, the factory, which employs 830 staff, is about to begin mass layoffs, with first employees to be handed pink slips by the end of this month. "Buyers interested in taking part in the talks will be expected to pay a security fee of PLN 15m. I believe this offer proves more attractive and we will be able to select an investor shortly, before any redundancies begin," receiver Teresa Kalisz told reporters.

business. Now, as the prospect of mass redundancies is becoming increasingly realistic, their negotiating position is much stronger, with no additional strings attached to the asset. Poland is Europe's top producer of household appliances alongside Italy. A number of top global white goods makers, including Electrolux, Whirlpool, BSH, LG and Samsung, have established factories in Poland. Poland-based home appliance manufacturers as a whole, boosted their large appliance output by 9% y/y in January-August 2014 (reaching 12.3m units), reported the industry organization CECED. Last year Poland exported some PLN 14bn worth of home appliances, some 10% more than in 2011.

MANUFACTURING & PROCESSING

Investors are playing the waiting game with the creditors and employees of FagorMastercook. Photo: FagorMastercook

The Wrocław plant is currently manufacturing cookers, washing machines and kitchen hoods under a PLN 86m order from Algeria's Cevital. The contract should keep FagorMastercook busy until the end of this year and the creditors have agreed to extend the plant's life until the end of Q1 2015. The modern factory has caught the eye of Polish Amica as well as Germany's BSH Bosch und Siemens Hausgeräte GmbH, which had even obtained regulatory permission to buy FagorMastercook. The potential buyers are taking their time, however, as the terms of the original tender, besides the price, took into consideration also the new owner's plans for the

Sharp sells Toruń TV plant to Slovakian contract manufacturer There is hope for the estimated 700 employees of the Sharp television plant in Ostaszewo near Toruń, despite recent reports that the Japanese manufacturer had decided to close up shop in Europe. The Japanese have just inked an agreement with Universal Media Corporation Slovakia (UMC), which is to acquire Sharp Manufacturing Poland by the end of the year and maintain production at the site. "With UMC as our sole owner, we will continue making TVs for Sharp and other clients," Witalis Korecki, director of the Toruń plant, told reporters. UMC is a contract manufacturing firm that makes flat screen TVs under a number of brands, including UMC,

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Blaupunkt and Technika (the latter can be found at Tesco hypermarkets). It employs an estimated 700 staff in Slovakia, China, Germany, Switzerland and the UK. UMC said it was determined to develop production in Toruń and possibly create new positions at the plant. Sharp's European business has failed to show profits since the 2008 financial crisis, despite various efficiency improvements, cost cutting measures and new product launches. The company has decided to end direct presence in the European market, where from now on it will be represented by UMC (in audiovisual equipment) and Turkey's Vestel (in home appliances). Opened in 2006, the Sharp factory in Poland was hailed as one of the largest Japanese investments in the country, as the company has brought with it a number of subcontractors, who set up shop in the area, creating an electronics cluster known as the Crystal Park. The latter was included in the Pomeranian Special Economic zone, which gave Sharp and its partners a number of tax incentives. The entire cluster were to create 10,000 jobs, with Sharp alone pledging to recruit 3,000 employees. The reality proved much different, with Sharp gradually winding down operations, and some of its subcontractors jumping ship. Two years ago the company admitted it would not be able to fulfill its obligations towards the zone, and gave up all privileges it had received.

BANKING & FINANCE

Interest rates down to a new record low In line with market expectations, the Monetary Policy Council (RPP) has cut the cost of borrowing, hoping to

help the Poland's weakening economic growth regain traction. Although an interest rate cut had been widely anticipated, its scale has come as a bit of a surprise to economists. While most observers had been banking on a 25 bps cut, the RPP instead slashed the main reference rate by 50bps, to a new historic low of 2%, and reduced the Lombard rate by as much as 100bps, down to 3%, at the same time leaving the deposit rate unchanged at 1%. Since according to Poland's "anti-usury" law the maximum interest on loans to households cannot be higher than 4x the Lombard rate, the RPP's decision seems to be aimed at reinvigorating the consumer debt market in particular. "The asymmetrical cut in the Lombard rate makes the NBP's October rate decision an equivalent to a 75bp "standard" rate cut. Taking into account the average interest on consumer loans (12.5%) and a strong divergence between banks, the 400bp cut in the consumer loans interest rate cap (4x the cut in the Lombard rate by 100bps) – from 16% to 12% - may, according to our estimates, lower the average interest rate on consumer loans in the banking sector by at least 200-250bps. This, in turn, might boost consumption growth by up to 0.3pp," commented PKO BP analysts. According to the official communiqué issued by the RPP, the rationale behind such a deep cut has to do with the "series of data pointing to a deceleration of economic activity and growing risk of the inflation remaining below the target in the medium-term." The council said they "do not rule out further adjustment (…) should the data, including the NBP November projection, confirm a considerable risk of inflation remaining below the target in the medium term." In recent months Poland has experienced its first ever deflation, which combined with sluggish performance of its key European partners and tensions across the

eastern border strengthened the fears of a weak growth scenario for the country in the near future. According to many analysts, only a string of cuts adding to up 75-100bps, could make a difference, even though their impact will be felt no earlier than late 2015. After all, monetary policy measures, however far-reaching, take time to the trickle-down to the real economy. "We think that more easing is needed and we expect the NBP to ease monetary policy further in the coming months. However, given the larger rate cut today, the NBP might take a breather before it cuts again. Hence, the NBP might pause in November but it might deliver 25bps in December and more next year. When we look at our inflation model, we expect deflation to deepen further in the coming months while economic growth should slow further. This clearly strengthens the case for further easing," commented Danske Bank's Chief Analyst Lars Christensen.

PROPERTY & CONSTRUCTION

Warsaw developers b etting etting on public institutions to fill up new office buildings With more than 330,000 sq.m of office space expected to hit the Warsaw market this year alone the number one question on everyone's lips seems to be: who will occupy all those buildings? The city's modern office stock totaled 4.3m sq.m in 434 buildings as of end of June, ahead of Istanbul, Dublin, and Prague, with vacancy rates averaging 13%. Although Warsaw continues to attract new investments (just recently TNT and Moneygram decided to locate large shared services centers here), few developers believe new business

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can generate enough demand to match the expected supply. Many are counting on tenants relocating form older projects to new, green offices, but there is also a growing expectation for public institutions to start moving from their dated, Communist-era edifices to new, more efficient buildings.

Also in September, Poland's Civil Aviation Office (ULC) extended its lease office in Warsaw's Flanders Business Park, where the institution has been based since 2009. The new agreement is for over 6,600 sqm of office space, making it one of the biggest deals of this type in Warsaw in 2H 2014. Developed by Flemish company Liebrecht & wooD, Flanders Business Park currently offers close to 14,500 sq.m, but the developer is getting ready to add a further 22,100 sq.m of BREEAM-certified office space to the project in the near future.

Selected public sector tenants in modern office buildings in Warsaw Tenant

Area

Building

(sq.m)

ARiMR

Poleczki Business Park

16,500

Frontex

Rondo1/Warsaw Spire

14,600

Domaniewska Office

13,000

Poczta Polska

Hub Urząd Rejestracji

Adgar Park West

13,000

Green Corner

11,700

Produktów Leczniczych GDDKiA Sąd Rejonowy GITD Mazowiecka Spółka

Plocka

9,300

Equator I

7,000

Bolero

6,800

Flanders Business Park

6,600

JM Tower

6,500

Empark

6,500

Gdański Business Center

5,600

Gazownictwwa Urząd Lotnictwa Cywilnego ZTM IPN

The Civil Aviation Office is among the key tenants at Flanders Business Park. Photo: Liebrecht & wooD

In recent weeks the Warsaw market has seen a number of large office leases involving public institutions, but not enough to determine whether one can talk of an actual trend. In September, Slovakian developer HB Reavis had acquired a public tenant for nearly 6,000 sq.m at building B of Gdański Business Center. According to unofficial reports, the mysterious o is Agricultural Property Agency (ANR), a government institution, which will occupy the said space from April 2015 through March 2022, paying less than EUR 15 per sq.m per month. With prime headline rents in Warsaw topping EUR 25/sq.m/month, the ANR deal indicates the direction in which the Warsaw market seems to be heading at the moment. Gdański Business Center currently includes two buildings with a combined GLA of 46,000 sq.m, but HB Reavis is to add a further 50,000 sq.m (two buildings) to the scheme.

ANR Source: CBRE; Poland Today

Gdański Business Center will be the new home to Poland's Agricultural Property Agency.

Photo: HB Reavis

More recently, at the beginning of October, Poland's Main Inspectorate of Road Transport (GITD) has signed a lease agreement for 7,000 sq.m of space in the Equator I, an office building in Warsaw's Ochota district, commissioned in 2008 and currently belonging to Austria's Immofinanz Group.

"Our observations suggest that the public sector's interest in office space in commercial buildings has been growing since 2009 – 2010. Over the years, due to structural changes and the need to consolidate smaller units in one location, public institutions have started to search for efficient commercial solutions. The Main Inspectorate of Road Transport is a good example of this. Due to a growing number of projects, it looked for a large and efficient office space in one location instead of several smaller units in different locations, said Michał Lis, Associate Director, Office Agency JLL. According to CBRE, the current tenant-friendly situation on the Warsaw market creates an exceptional opportunity for public sector occupiers to get good deals on more cost-effective and employee-friendly spaces.

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As corporate tenants keep relocating to newly-built class A projects, they leave behind good quality modern offices that could be taken up by public institutions. The latter care less about visibility and accessibility of the buildings and can accept a slightly lower standard in exchange for a cheaper rent and more flexible terms. "From an investorâ&#x20AC;&#x2122;s point of view, any public sector organization is an attractive tenant; they offer financial stability and are open to signing long-term agreements. The high level of institutional lease security is one of the most important strengths of these buildings for buyers, assuming they can accept rents paid in PLN. However, for international funds this can be a significant disadvantage of such lease agreements. On one hand the public organizations can accept only national currency, but on the other the exchange risk is too high for investors. However, there are ways to limit the risk and provide acceptable solutions for both sides. For the time being, the public sector share in total office take-up amounts to around 8% in a small number of buildings, therefore investment transactions of such schemes are relatively rare. In the future however, this situation may change," CBRE experts wrote in a recent report.

RETAILERS

Polish fashion giant giant LPP speeds up expansion in Ge Germany Poland's top clothing retailer LPP is stepping up its foreign expansion with 30 new Reserved outlets to open in Germany over the coming three years, the company announced last week. LPP has secured leases

in a number of new locations, including one for a new flagship store in Berlin.

two set to follow in October (Stuttgart and Bremen) and one in December (Hanover).

"The opening of our Berlin outlet is part of our expansion strategy that aims at opening stores in the best locations of German cities. We are planning to open three new Reserved outlets in that market by the end of this week," said Piotr Dyka, LPP's deputy CEO, responsible for the Reserved brand.

Germany marks the beginning of LPP's westward expansion. So far the company has concentrated its operations on Poland and a number of Central and Eastern European markets. The Warsaw-listed retailer is currently in the process of introducing all of its five brands to Croatia and early next year it will open the first Reserved store in Qatar. The decision to go west is partly due to the recent events in Russia (where LPP has 254 stores) and Ukraine (64 stores), where the Polish retailer had to scale down its expansion plans. Last year the two markets generated the respective 19% and 4% of LPP's revenues.

LPP runs more than 410 Reserved outlets.

Photo: Reserved

"Germany is the largest clothing market in Europe and number four in the world, a very mature one and one that's oriented towards international brands. We are in an industry where one has to be constantly on the lookout for new expansion possibilities. Our goal is to be present in Europe's most prestigious fashion streets," Dyka added. Reserved's flagship 2,000 sq.m store in Berlin will launch in 2016 on TauentzienstraĂ&#x;e. The company has also secured a location for a 2,400 sq.m outlet in Mannheim, a city of more 300,000 inhabitants. The first Reserved-branded store in Germany opened in September in Recklinghausen, with another openings

LPP designs and sells clothing under five brands: Reserved (410 stores), Cropp (379), House (326), Mohito (243) and Sinsay (104). According to plans, a new sixth brand is to be launched in 12016. Similar to its global competitors, the Polish company orders most of its products from subcontractors in Asia. Last year the company sold more than 70m items of clothing for a total of PLN 4.1bn. As of end of June 2014 it had 1,488 shops with a combined floor space of 674,000 sq.m.

RETAIL PROPERTIES

Polish Gemini Holding to build large shopping center in Tychy Krakow-based developer Gemini Holding is working on its third investment in Poland, a retail park with a GLA of 32,000-36,000 sq.m in Tychy, a city of 100,000 residents located near Katowice. One of the largest

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projects of its kind in Upper Silesia, Gemini Park Tychy is to reach completion in the spring of 2016. With a catchment area of approximately 2.3m people within a 40m car ride, the project is targeting shoppers from Tychy as well as Gliwice, Katowice, Dąbrowa Górnicza and Mysłowice. Gemini Park Tychy will be located on Beskidzka St, one of the city's key thoroughfares. There are a number of large housing estates in its immediate vicinity and the location offer easy access from the popular A4 motorway. "Tychy is a great location, with high purchasing potential and a relatively low supply of modern retail space. We are in talks with a number of prospective anchor tenants and assessing the capabilities of large grocery operators and renowned clothing chains. At the moment, we are in the process of obtaining all of the required permits and documentation that will enable us to break ground on the project. The construction will begin once a satisfactory level of pre-leases has been reached. We expect to open Gemini Park Tychy in Q1 2017," Anna Malcharek, Managing Director of Gemini Holdings, tells Poland Today.

Gemini Park Tychy is to launch in 2017. Photo: Gemini Holding

Gemini Holding launched operations in 1993, first as a property partner of British Petroleum, and later as a developer of retail properties for supermarket operators, such as Geant, Carrefour, Tesco and Lidl. The company opened its first shopping center in BielskoBiała in May 2009 and in September 2010 added Gemini Park Tarnów to its portfolio. Its future develop-

ment pipeline, besides the Tychy project, includes a retail arcade in the popular mountain resort of Zakopane as well as other shopping centers in Upper Silesia and Kraków. "Our portfolio includes two well-functioning shopping centers in Tarnów and Bielsko-Biała. Our strategy is to keep on increasing the value of our properties over the long term and at the moment none of our investments are for sale" says Anna Malcharek.

FOOD

Ferrero expands Polish confectionery plant Italian confectionery firm Ferrero is embarking on a large-scale expansion of its Polish production unit in Bełsk Buży near Grójec (40km south of Warsaw). The company has just awarded two contracts with a combined value of PLN 154m to the Spanish-owned construction company Budimex. Under these deals, Budimex is to deliver a brand new building with two production levels (10,000 sq.m each) and three office floors (840 sq.m each) as well as a high bay warehouse (floor size: 5,800 sq.m; capacity: 35,000 pallets), transshipment hub (3,600 sq.m) and overpasses connecting the new storage facility with the production area. The project is to reach completion in August 2015. Ferrero launched the Polish factory in 1997. The site produces and/or packages the popular Nutella hazelnut spread as well as Kinder Surprise, Kinder Bueno and Rafaello-branded confectionery products, which are exported from Bełsk to 60 global markets, including much of Europe.

POLAND BEATS GERMANY FOR FIRST TIME EVER Poland’s national football team shocked the world on Saturday with a convincing 2:0 victory against defending world champions Germany in a Euro 2016 qualifying fixture. It was Poland’s first-ever win against Germany in competitive play (19 matches total), and the first time the Germans had lost an away qualifier in 13 matches and 16 years. (They last lost away to Turkey in 1998.) It was also German manager Joachim Löw’s side’s first defeat in 19 competitive outings. The win was made all the sweeter in that it was accomplished at the new National Stadium in Warsaw. Poland’s two goals were scored by Arkadiusz Milik (51st minute) and Sebastian Mila (88th minute), while goalkeeper Wojciech Szczęsny, who plays for Arsenal, had a phenomenal night with 14 saves. When the final whistle blew Poland went wild, with parties throughout the country lasting long into the night. The win was the lead story in all of the major newspapers and on all of the major television networks, which concentrated most of their coverage on the result of the match for the following day. Social media was also abuzz, with Poles and Polandwatchers throughout the world sharing their thoughts on the match. “Strong economy, Nato member, volleyball champ and now beats Germany in football – upside-down world with Poland on top,” tweeted Jan Cienski, a well-known journalist and Poland Today contributor. The win puts Poland atop of its group in qualifying for the 2016 European championships in France, with six points. A win against Scotland on Tuesday in Warsaw (match time 8:45 pm) virtually guarantees Poland will qualify for the tournament. According to sports network ESPN, the win increases Poland’s chances of making Euro 2016 from 23% to 40%. Poland Today editor Andrew Kureth praised the rise in team sports in the country two weeks ago in an opinion piece for Business Review+. You can read it in No. 054 page 11 and on the PT website.

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25 YEARS OF TRANSFORMATION

New ways of doing things Poland Today talks to: Adam Purwin, CEO at PKP Cargo

Photo: PKP Cargo

• PT: What stage of your life were you at in 1989 at what are your memories of that period? Adam Purwin: I was 14 at the time so my impressions of the transformation have a lot to do with access to Western culture, music and art. Suddenly travelling became so much easier. I was fortunate in that my parents made sure I got to see the world. Going to London as a teenager I witnessed the West with my own eyes for the first time and I could sense that things were organized in a very different way over there. But at the time, not even in our wildest dreams could we expect that one day Poland would resemble that world. In those days, returning to Warsaw from the West felt like travelling back in time. I don’t get that feeling any more when I land here. Now it’s just another European city. I cannot say that as youngsters we felt particularly oppressed under communism. We were not aware of the limitations of the reality we in-

habited, and at the same time we were not conscious of what to expect of the new world unfolding before our eyes. At the time no-one really dared to dream that achieving what we have achieved would be attainable. • PT: Was there a moment you felt the country was on the right track? AP: This has been such a gradual process that I cannot name a single defining moment like that. The gap between Poland and the West was so immense, one lacked any vision of how to bridge it. I don’t think people really believed we ever would. There was a definite sense of something ending, but no-one knew what the next step would be. • PT: How about the early days of your career? What are your impressions of that period? AP: I went to law school, spent some study abroad time in Canada, and travelled across the US. Looking back at that road trip, it made me feel like the catching up that awaited Poland simply could never be done. The distance was simply too far. And yet, here we are. At my first job at BRE Bank, where I spent a couple of years, learning the ropes of currency markets and participating in big international projects, and later at Pekao SA’s corporate desk, I met people similar to myself; people who took up challenging jobs at international corporations in order to learn all those essential things no university could teach us, for instance teamwork or project management. A whole generation of people were consciously trying to learn different ways of doing things, because the old ways in Poland were incompatible with the emerging new reality. A lot of credit always goes to the Solidarity movement for setting off political change, but I’d say that it’s our generation, the 30- to 40-year-olds, who were the true catalysts of transformation. We have been the ones who implemented the modern ways in business and administration. But our mundane day-to-day efforts are not something that gets applauded or even noticed, even though this is how true change is being made.

• PT: What would you say was Poland’s biggest achievement? AP: The fact that all this immense change took place without deep conflicts and bitter divisions in the nation. Poland is still work in progress, in many ways – a country that is still being pieced together from different cultures, religions, and legacies of foreign powers that used to occupy us. The contrast in affluence between the east and west of the country remains deep. Coming from Białystok, near Poland’s eastern border, I myself can testify to that. Different regions vary also in their sensitivity to history. Yet, despite all those differences and the huge change the country has undergone, we remain largely united, especially the younger generation. • PT: Was there anything we could have done better, as a country? AP: I regret the loss of Polish art and culture, and by this I mean music, architecture or design. I feel like what’s available out there is way below our potential. Take, for instance, the chaotic way Polish cities and streets look these days. Polish design from the 1960s or architecture a few decades ago were world class. Something got lost along the way while we were busy catching up with Europe economically. Could it be due to many of the creative people who could have contributed to Poland’s cultural and aesthetic refinement having left the country? Fortunately, Polish culture is beginning to re-emerge, perhaps because we’ve gotten better off, but a nation of 40 million people is certainly capable of achieving more. • PT: What should Polish companies do in the future in order to remain competitive? AP: They should open up to the world and foreign competition. That’s the only way to grow, learn and test their existing business models. The easy sources of growth, such as EU subsidies, are about to run out and this will be a true reality check for us. The earlier we start confronting our models with established,

weekly newsletter # 056 / 13th October 2014 / page 9

global ways of doing business, the better we will be prepared for this crucial test. Another important issue is innovation. We can’t do without it. • PT: Innovation has become a bit of a buzzword. We all know we need more of it, but how do we go about getting there? AP: I believe there has to be a grassroots drive to innovate among entrepreneurs and more appreciation of innovation and innovators in the society. State-run programs and artificially created ‘innovation clusters’ cannot substitute a natural hunger for progress. The past two decades we were busy catching up and then spending EU money, and as a result we may have lost some of that thirst and awareness that drives innovation. But the Poles are finally getting over the fever of transformation and I am sure we’ve still got what it takes to excel. Looking at other countries, I don’t see innovation as something ingrained in the DNA. The Poles can be just as innovative as other nations. The society simply has to recognize and appreciate creativity, starting from school curricula, proper infrastructure and friendly regulations. The ferment is already there and with the right environment we can simply help it achieve its momentum faster. • PT: Let’s talk a little bit about the railway sector. Why has the change been so slow there, as opposed to other key industries? AP: This is a pan-European issue really. I don’t think Poland is doing so much worse in this respect than other European countries. The liberalization has been slow, because we are talking about complex ecosystems that involve problems with infrastructure, ageing rail stock, state ownership, strong trade unions and a legacy of employee benefits and inefficient management. The attitude in Europe has been as follows: as long as it functions somehow, we better not touch it. Against this backdrop, Poland’s rail freight sector is doing very well. PKP Cargo is the number two player

in Europe after DB Schenker, and we hold a 60% share in the Polish market.

FROM STATE-RUN MONOPOLIST TO EUROPEAN GIANT PKP Cargo is the European Union’s second largest railway freight company after Deutsche Bahn AG and the first publicly listed one, following its recent IPO on the Warsaw Stock Exchange. The state-owned railway group PKP currently holds a 33% stake in the company, which carried around 114m tonnes of freight last year, mainly hard coal and building materials. PKP Cargo saw its revenues top 4.72bn złoty in 2013, down from 5.16bn złoty in 2012, while its net earnings slumped to 74m złoty from 268m złoty, due to economic slowdown and over 200m złoty worth one-off privatization bonus. The company has emerged from the brink of bankruptcy caused by the economic crisis at the end of the last decade. In 2008 and 2009 it posted net losses of 179m złoty and 498m złoty, which prompted an indepth restructuring that saw some 20,000 positions cut, and many redundant side businesses and regional units closed down. The overhaul proved effective as the business is back in the black and expanding abroad. PKP Cargo has obtained licenses to independently operate in Austria, Belgium, the Czech Republic, Germany, Hungary, Lithuania, the Netherlands and Slovakia. Warsaw-based PKP Cargo had a 60.3% share in the Polish market in 2012 and controlled 8.5% of total rail freight in the EU. That compares with DB Schenker’s 28% and 5.4% shares in the EU and Poland, respectively.

• PT: What’s your recipe for success? AP: You have to believe it can be done. When we were getting ready for PKP Cargo’s IPO, people doubted us, because there had been no listed national rail freight

firm in Europe before. We proved that you can make a profitable, well-managed business out of a former state-owned enterprise without an external, foreign investor. This was done by Polish managers only. We focused on our clients and on numbers, trimmed the fat where necessary, realigned our resources, and changed the way work was organized across the entire company. But it will always be a work in progress. In today’s economy, no-one can afford to be resting on their laurels. Of course, all our achievements aside, PKP Cargo owes a great deal to the way Poland’s PKP railway group was restructured, which left all debt in the parent company. Hence, since the moment PKP Cargo was spun-off from the group, we’ve been able to fully focus on operational improvements without having to deal with financial restructuring. I feel that we are now well-placed to begin expanding. • PT: Considering your already strong position in Poland and Europe, what’s the next step? And what are your strengths vis-a-vis European competitors? AP: For one, we are benefiting from Poland’s location at the crossroads of Europe, with access to seaports. There is, and will be, a natural movement of goods across the country and we are tapping into that. Furthermore, PKP Cargo is now a well-run, well-financed business, which is not always the case with our rivals. We are sitting on some 800m złoty of cash, which we intend to put to good use by acquiring domestic and foreign businesses that complement PKP Cargo. We are currently in talks on a number of acquisitions, including CTL Logistics and Pol-Miedź Trans in Poland and the Advanced World Transport B.V., which operates primarily in the Czech Republic. • PT: Isn’t the competition watchdog going to throw a wrench in your plans? PKP Cargo already controls 60% of rail freight in Poland. AP: Prior to restructuring, we had a 100% share in the Polish market and we believe it makes sense for us to try to win back at least some of what we lost. Most of

weekly newsletter # 056 / 13th October 2014 / page 10

the remaining rail freight players in Poland are subsidiaries of large industrial groups, such as KGHM or Grupa Lotos, and serve their own logistical needs. Should those companies decide it’s better for them to outsource freight to PKP Cargo, who’s to call that an attack on free competition? Moreover, we think of PKP Cargo as a European company and therefore we believe market concentration issues should be considered at the European, not national, level. We are licensed to operate in eight European countries are we are seeking to enter more. Last but not least, it is in Poland’s interest to channel more goods traffic to railways and strengthen this sector. The containerization level – the ratio of the number of containers per capita – is six times lower in Poland than in the EU, which translates into more truck traffic, more congestion, and more pollution. This is something the authorities should definitely take into consideration. • PT: Your business largely relies on shipping coal and aggregates. As Europe pushes for cleaner sources of energy and Poland’s infrastructure development programs reach completion, what will your trains carry? AP: Whether we like it or not, coal will remain a key element of Poland’s energy mix for many years to come. I don’t see that changing any time soon. Whether it’s extracted locally or imported from abroad, someone will have to carry it and I hope it will be us. As for aggregates, it’s true that the sector is nearing its peak, after which the volumes will gradually decrease. We believe their place will be taken by containers and this is why our investment focus is on developing intermodal transport. Transporting highly processed goods in containers will be the way of the future. PKP Cargo was a partner of Poland Today's Poland Transformed conference.

25 YEARS OF TRANSFORMATION

Business, transformed Poland Today takes a look at how various sectors of the Polish economy have changed over the past 25 years in the run-up to its Poland Transformed Business Awards Gala

made the złoty convertible. The shock therapy programme unleashed a wave of new business. Within days, goods flooded Poland, as thousands raced to Vienna, Berlin, Istanbul and anywhere else they could get their hands on goods demanded back home. They filled white, striped nylon bags with leather jackets, socks and jeans and then waited in queues lasting days on the German border to come home to legally sell their goods. Polish farmers slaughtered hogs, cows and chickens and then sold the produce out of the back of their cars on city streets.

by Jan Cienski

Twenty-five years ago Poland was a basket case. The country was bankrupt. Hyperinflation was eating up people’s savings. Infrastructure was a dilapidated mess – with some roads not seeing much maintenance since the war. Toilet paper, close in texture to newsprint, was a rare consumer find. Shops carried grabby names like “Bread”, “Shoes” and “Dairy” – titles that failed to properly describe the often empty shelves within. Coal was a leading export, albeit sold for less than it cost to mine. Forty -five years of communist rule had left Poland poor and trailing far behind western Europe. The challenge facing the non-communist government of Tadeusz Mazowiecki that took power in August 1989s was to try to remake a market economy in that devastated environment. Adam Michnik, a leading dissident, once compared what communism did to a market economy to the process of turning an aquarium into fish soup. Now, the reformers in the new government had to find a way of remaking the delicate balance of capitalism. On January 1, 1990, the government passed a radical reform package under the aegis of finance minister Leszek Balcerowicz which freed most prices, ended government support for state enterprises, eased restrictions on foreign companies and on imports and

That rush of new businesses helped return Poland to growth by 1992 – and the country has not had a recession since, the most successful record in Europe. Many of those sidewalk sellers are now real businessmen, and the transformation of Poland from a poor and peripheral country into a secure and increasingly wealthy member of the European Union is in large measure due to the private businesses – foreign and domestic – which have reshaped the country. The soup has been turned back into an aquarium. Poland Today takes a look at how various sectors of the country’s economy have transformed in this rejuvenated ecosystem.

Retail Tatty and empty shops were a visible sign of the Communist Party’s failure to supply its population with even basic consumer goods. During the four decades of People’s Poland, the best way to get everything from furniture to cars and laundry soap was to either use corruption and connections, or to spend days patiently waiting in lines outside of shops. A complete culture of line etiquette even sprang up, with punctilious attendance keepers making sure no one jumped ahead. Poles had always had access to farmers markets to buy food unavailable in state shops, and after 1990s bazaars became the country’s shopping malls. Within a few years sellers plying their trade on folding

weekly newsletter # 056 / 13th October 2014 / page 11

camp beds had moved their wares into more permanent shops, while foreign retailers also started to edge into the country. Today Poland boasts a full retail environment, from mom-and-pop corner shops to gleaming shopping centres. Malls have strayed far beyond the country’s largest cities, while the outskirts of most towns now feature big box retail, all supplied by a vibrant and very competitive wholesale industry.

Infrastructure

Back in 1989, Poland’s only highway was a piece of the old Berlin to Breslau (Wrocław) autobahn, built at a time when Adolf Hitler was chancellor and Wrocław was part of Germany. The road was a potholed mess, forcing drivers to weave desperately from lane to lane to avoid breaking their axles. A glance at the rail network still showed Poland’s 19th century division – with the German bit showing a dense grid, the Austrian sector in the south sparser branches, and lots of white spaces in the east that had been a Russian province. In the first 15 years after the end of communism, the government was too cash-strapped to embark on large new infrastructure projects. As a result small country roads were clogged with transport lorries and cars – signs of the country’s growing wealth – while train travel took significantly longer than before the war. That changed after Poland’s 2004 accession to the European Union. A flood of structural funds allowed for the construction of highways, city bypasses and modernised rail lines, while cities and towns built swimming pools, sidewalks, sewage plants, football fields and stadiums. The construction boom has drawn in both foreign and domestic companies, although many have subsequently been burned by the government’s insistence on choosing the cheapest bidder for big contracts.

Media Poland had the communist world’s most vibrant underground media. After martial law was declared in 1981, thousands of journalists lost their jobs, and many

ended up working for the thousands of illegal newspapers and magazines published on hidden printing presses and distributed around the country. One of the key opposition demands in the Round Table Talks leading to partly free elections was the creation of an independent press. That came true in spades. After 1989 Poland saw the existing state-owned print monopoly broken up, with both foreign and domestic publishers fighting for readers. The number of those readers has been steadily declining for years, causing growing pain for print. Poles have long preferred to get their news and entertainment from the screen, both television and the internet. At the Poland Today Transformation Awards Gala, which will take place on Tuesday, December 9 at the Sofitel Warsaw Victoria Hotel, a company from each of the sectors outlined here will be announced as the winner of the ‘Most Transformational Company’ Award, as judged by panels of experts in each sector. Jan Cienski, who is writing a book on Poland’s transformation, is a jury member.

Agriculture & food Poland’s doughty peasant farmers resisted communist collectivisation, leaving the country divided into a patchwork of tiny farms. Those plots helped keep a lot of people fed during the grim days of communist shortages, but today they are increasingly irrelevant in a sector which is quickly modernising. Domestic farmers and foreign corporations have built modern agribusinesses, from pork production on an industrial scale to making Poland the world’s largest apple exporter – something that caused significant economic pain when Russia closed its market to agricultural imports. Forced to adapt to EU sanitary norms, the days of milk producers leaving cans of slowly decaying milk on the side of the road to be eventually picked up by a horse-drawn cart are long gone. That production is now processed by very modern companies, making

yoghurt, frozen foods and packaged meats on an huge scale.

IT & telecoms

Some of Poland earliest and most successful capitalist businesses first imported and then assembled computers, supplying businesses, gamers and schools. As the capitalist economy grew in complexity and businesses grew in size, there was an increasing need for management software to allow manager to control their enterprises. Polish companies, relying on very cheap but very good programmers, filled that niche. Eventually, they grew large enough to expand outside the country, and now Poland hosts some of Europe’s largest software developers. In telecoms, older Poles remember heading down to the post office to book a phone call to distant destinations like Rzeszów and Gdańsk, not to mention Toulouse and Toronto, and patiently waiting for hours to get a crackling connection. Today, like in almost every wealthy country, smartphones are ubiquitous while mobile providers race to provide ever more and ever faster bandwidth.

Healthcare

Government-run healthcare systems are the object of complaints for citizens from Belfast to Barcelona, but Poland’s chronically underfunded system has been a particular focus for disgruntled citizens. That dissatisfaction opened the door for private sector competitors. Often starting with clinics aimed at well-earning expats, private hospitals now have a growing share of the Polish health market. Many also cater to foreign patients, eager to take advantage of the high quality and cheap prices of Polish doctors and dentists. Many of the largest private companies have also started providing insurance, while some have expanded across the region.

Energy

Poland’s energy generation and distribution system saw very little investment in the first decades after the

weekly newsletter # 056 / 13th October 2014 / page 12

country’s economic transformation. But now, as power plants are nearing the end of their useful life, Poland is facing a wave of new plant construction. Previous almost exclusive reliance on coal is being diluted with natural gas and an increasing number of green power sources, from wind to biofuels. The sector has been broken up into several large local companies, with a handful of foreign players also angling for a piece of the market.

Transportation A quarter century ago, cars were a luxury available to only a few; most Poles got around using buses and trains – usually very low and rattling buses and trains. On summer runs north to the beaches of the Baltic coast or winter trains south to the Tatra mountains, the crush was so great that conductors didn’t even bother squeezing through the wagons to check tickets. Every bit of available space, including corridors and toilets were crammed with passengers. Today the buses, airplanes and trains do not differ in comfort and quality from those found in Western Europe, although travel times can still be longer thanks to road and rail infrastructure that still lags the wealthier western half of the continent. While in the past all of those services were provided by government monopolies, Poland has privatised much of its transport businesses and opened the sector to competition. That has the post office fending off aggressive rivals, while a host of bus companies vie for business on Poland’s roads.

Production Communist Poland was an industrial country. The Solidarity labour union got its start in the sprawling Lenin shipyard along the Baltic coast, and the Party put great stock in the brawny business of factories staffed with sweat-stained proletarians. Today’s modern nation continues to rely on industrial production for a third of gross domestic product – one of the highest levels in Europe. But unlike the polluting smokestack industries that scorched Polish cities in acid rain before

1989, Poland’s modern factories are some of the most competitive in the world. Instead of workers in overalls, robots and engineers are now a common sight on shop floors. Poland produces car parts and cars, buses, trains, helicopters and furniture – Poland is actually the world’s fourth largest furniture exporter by value. Poland’s industrial base is a mix of foreign – particularly in global products like cars and aviation – and domestic companies making everything from the parts that fuel Germany’s auto industry to finished goods like locomotives and ships. Transformative future: Preceding the Poland Today Transformation Awards we will hold the Business Future Forum, a conference where decision makers will explore what lies ahead for Polish business. After all, while Poland's businesses can claim success after 25 years, they must not rest on their laurels. There is still much work to be done, but which direction should the various sectors turn? Find out at the Sofitel Victoria Hotel in Warsaw on December 9.

Raw materials Coal, oil and metals formed the backbone of the communist era economy and they continue to be hugely important to Poland today. Most raw materials extraction and processing is in the hands of state owned or state controlled companies, but several of them have managed to expand beyond Poland’s borders, becoming some of the country’s first multinationals. The government continues to keep a close eye on these sectors, usually treating them as strategic, both because of the large numbers of people they continue to employ and because they supply the country with crucial resources.

Real estate developers Poland’s cities are still blighted with the hulking prefab apartment blocks designed to provide cheap and very cramped housing to the working classes. But in

the years since the end of communist rule, increasing Polish wealth has drawn in a growing number of real estate developers. They have transformed derelict post-industrial wastelands into office parks and shopping centres. Now many of Poland’s largest cities are ringed with low rise blocks housing outsourcing businesses, one of the country’s most dynamic sectors. New apartment developments range from cheap highrises to gleaming skyscrapers filled with luxury flats. The sector was battered by the economic crisis, which saw prices fall and new projects stall. But in recent years lending is again available, albeit on much more conservative terms than before the crisis, and there are signs that buyers are returning to the market.

Finance In communist times, cars and houses were bought with bags of cash – often US dollars – while state-owned companies gorged on cheap money supplied by the government. One of the key reforms after 1990 was the creation of a modern financial system. The new government raced to open a stock exchange, deciding to import existing models from the West rather than spending time to develop a Polish model. That, plus careful regulation, has turned the Warsaw Stock Exchange into the region’s largest capital market, making it a key ingredient in the country’s modernisation. The first halting steps in creating a non-state banking system were marred with corruption and insider dealing, but allowing in foreign banks opened Poland to the standards and know-how from more advanced banking sectors. That, coupled with a conservative regulatory regime, has left Poland with one of the healthiest banking systems in Europe, one that did not go under during the economic crisis and which continues to supply credit to consumers and businesses without endangering government finances. Working alongside banks and the bourse, Poland has a full range of private equity, from venture capital funds eager to take a risk on startups, to big firms investing hundreds of millions of euro across central Europe.

weekly newsletter # 056 / 13th October 2014 / page 13

OPINION

Healthy confidence or dangerous complacency? The Polish economy through the prism of the real estate industry

By Poland Today Editor in Chief Richard Stephens

Every year the Polish real estate sector descends en masse on the Expo Real and MIPIM property fairs in Munich (October) and Cannes (March) respectively. If you attend the same sector fairs on an annual basis, you’ll know how they all tend to blend together in one’s memory over the years. It’s almost impossible to recall which year was which when looking back. In my experience the one exception – when a particular edition really does stand out in the memory – was Expo Real in October 2008, when the global financial markets were melting down in front of our eyes. The normally heaving stands of the big German banks were deserted. People everywhere had panicked expressions on their faces or haunted looks in their eyes, no doubt contemplating the office building they’d just

completed but had yet to lease, or the secondary-city shopping centre which they’d just signed off on. At the Polish city and company stands, people talked about the need to brace for the inevitable financial fallout that would soon hit Poland, wreaking havoc. No-one I talked to doubted it. It was only a matter of how soon the Polish economy would be hit, and how much damage would be inflicted.

“The Polish real estate sector seems to be assuming that with the country’s economic growth rates at a relatively respectable level, things will be OK. In other words, there seems to be an air of complacency.” Everyone now knows that it didn’t quite happen that way – Poland weathered the storm pretty well. The memory of that edition of the fair, when everyone assumed that Poland was too weak to withstand global economic forces, came back to me last week when I was suddenly struck by the fact that the opposite seems to be the case now. The Polish real estate sector, taken as a whole, seems to be assuming that, with the country’s economic growth rates at a relatively respectable level, and safe in the knowledge that the next tranche of European Union funding is secured and will shortly start kicking in, things will be OK. In other words, there seems to be an air of complacency. The situation in Ukraine was barely discussed, nor the worrying state of the German economy. According to the Economist, the neighbouring giant’s GDP is heading for a second consecutive quarter of negative growth – in other words, a recession. Neither problem on each side of Poland’s borders seemed to register as a worry for those gathered at the Warsaw stand for the packed-out cocktail party. Of far more concern was whether Warsaw has too much office stock in its pipeline.

On the positive side, this speaks volumes as to how far the country has come. As little as seven years ago, voices warned that the financial crisis would wreak tsunami-like havoc on Poland’s economy. Now, a civil war next door hardly warrants the bat of an eye. That is significant progress for Poland. But one wonders if the pendulum has swung too far in the other direction. Certainly no-one believes more in the Polish economy than we do at Poland Today, but the country doesn’t exist in a vacuum. Geopolitical forces can sometimes move very quickly. While violence today is contained to Ukraine’s east, events could turn fast. The cease-fire there seems to be holding only tenuously, with fighting in some areas still occurring on a daily basis. One wrong move by either side and the still-hot coals of conflict could be reignited into an all-out conflagration. The German economy is not immune to downturns, and while the old adage ‘when Germany sneezes, Poland catches a cold’ is hopefully no longer the case, no-one can deny that its neighbour’s economic fortunes have a huge effect on the economy here. These concerns may be overstated, and we hope they are. But risks are there, and the industry should be prepared for them, rather than brushing them aside. Poland’s economy didn’t emerge totally unscathed from the credit crunch, in particular its real estate industry. You would think that this time around, despite Poland’s progress, industry leaders would be more attuned to risk. Let’s hope that the seeming oversupply in Warsaw’s office pipeline really is the biggest problem the sector will face in the months ahead.

weekly newsletter # 056 / 13th October 2014 / page 14

KEY STATISTICS Consumer Prices

Inflation Jun '14

Jul '14

Aug '14

Sector

y/y m/m y/y m/m y/y m/m y/y m/m

Food & bev

-0.8

-1.1

+3.8

+1.2

+2.1

+1.7

2% 1%

Year

2009

2010

2011

2012

2013

-0.8

-2.8

-5.1

-2.7

Turnover in PLNbn

582.8

593.0

646.1

676.0

685.7

0.0 +0.6

+0.1

-1%

+4.3

+5.5

+11.6

+5.6

+2.3

+1.3

Aug 14

+1.2 +3.9

-0.2 -0.2

y/y (%) Jun 14

0.0

Apr 14

+1.3 +2.4 +2.6 +0.3 0.0

-1.5

Feb 14

-1.0 +0.8

Oct 13

-0.1 +0.6 -0.2

Dec 13

+1.6 -0.6

Jun 13

-4.9

Aug 13

0.0 -0.4 -0.1

+4.7

+8.4

0.0

-0.1

-1.1

0.0 +3.8

+1.6

-1.1

Jul '14 Aug '14

-2.7

+0.1 +4.0

Transport

+0.2

May '14 Jun '14

+2.3

y/y (%)

Housing

Gross CPI

-4.7

Apr '14

m/m (%)

-1.6

-4.6

-1.1

m/m

-2.1

Clothing, shoes

Communications

-0.1

-1.7

Apr 13

+0.2 +4.0

-0.3

Feb 13

Alcohol, tobacco +3.9

-0.9

Month y/y

Dec 12

-0.4

Retail Turnover

Oct 12

May '14

Aug 12

Data in (%)

-0.3 -0.4

Residential Construction Dwellings

2009 2010

2011

2012

2013 Jan-Aug y/y

178.8

174.9

184.1

165.1

138.7

158.1

162.2

141.8

(in '000 units)

Producer Prices

Industrial Industrial Output

Permits

2014

(%)

105.8

+15.6 +16.5

Commenced

142.9

127.4

99.5

m/m (%)

-0.1

-0.2

-0.1

+0.3

m/m (%)

-1.8

+9.4

-2.3

-1.7

-0.1

+2.0

-8.5

U. construction

670.3 692.7 723.0

713.1 694.0

705.7

-0.1

y/y (%)

-1.4

-1.3

-0.7

-1.0

-1.8

-2.1

-1.5

y/y (%)

+5.3

+5.4

+4.4

+1.7

+2.3

-1.9

Completed

160.0 135.7

152.5

88.7

-2.9

Year

2007

2008

2009

2010

2011

2012

2013

Year

2007

2008

2009

2010

2011

2012

2013

Source: Central Statistical Office (GUS)

y/y (%)

+2.0

+2.2

+3.4

+2.1

+7.6

+3.3

-1.3

y/y (%)

+10.7

+3.6

-3.5

+9.8

+7.7

+1.0

+2.2

Gross Domestic Product (ESA2010)

Month

Feb'14 Mar'14 Apr'14 May'14 Jun'14 Jul'14 Aug'14

Feb '14 Mar '14 Apr '14 May '14 Jun '14 Jul '14 Aug '14

Construction Output

Construction Prices Month

Month

Feb'14 Mar'14 Apr'14 May'14 Jun'14 Jul'14 Aug'14

Month

Period

Feb '14 Mar '14 Apr '14 May '14 Jun '14 Jul '14 Aug '14

m/m (%)

-0.2

-0.1

0.0

m/m (%)

+18.7

+24.2

+3.2

+14.0

+16.9

+0.9

-5.4

y/y (%)

-1.7

-1.6

-1.5

-1.4

-1.2

-0.9

y/y (%)

+14.4

+17.4

+12.2

+10.0

+8.0

+1.1

-3.6

2007

2008

2009

2010

2011

2012

2013

Year

2007

2008

2009

2010

2011

2012

2013

Year y/y (%)

+7.4

+4.8

+0.2

-0.1

+1.0

+0.2

-1.8

y/y (%)

+15.5

+12.1

+5.1

+4.6

+11.8

-0.6

-12.0

Source: The Central Statistical Office of Poland, GUS

Gross Gro ss Wages

131.7

146.1

GDP in PLN bn current prices

Growth y/y unadjusted

Current account def. in % of GDP

Q2 2014

+3.3%

413,457

-0.9%

Q1 2014

+3.4%

397,429

-1.0%

Q4 2013

+2.7%

455,528

-1.3%

Q3 2013

+2.0%

405,554

-1.9%

2013

+1.7%

1,662,052

-1.3%

2012

+1.8%

1,615,894

-3.7%

A: avg monthly wages in PLN B: indexed avg wages, 100=2005

Sentiment Indicators

2011

+4.8%

1,553,582

-5.0%

Sector

Economic sentiment and consumer confidence indicators

2010

+3.7%

1,437,357

-5.1%

8,615

196 6,333

144 6,382 145

3,625

158 3,690

161 3,663

160 3,743 163

Energy

6,021

183 6,736 205 6,358

193 6,020 183

Construction

3,766 160 3,895

166 3,706

158 3,884 166

Retail & repairs

3,408

145 3,456

147 3,544

151 3,577 153

Transportation

3,589

127

3,913

138 3,666

IT, telecoms

6,654

173 6,695

174 6,987

181 6,835

177

Financial sector

6,109

137 6,602

148 6,747

152 6,738

151

National average 3,652

145 3,823

152 3,895

155 3,740 149

Source: Central Statistical Office (GUS)

130 3,650 129

100

-20

-40

60 Se p 14

138

120

Jun 14

6,061

Manufacturing

C onsumer confidenc e (le ft a xis) Economic se ntiment (right axis)

M ar 14

Dec 13

Sep 13

Jun 13

Ma r 13

Dec 12

Se p 12

Q2 2014

Jun 12

Q1 2014

Mar 12

Q4 2013

Dec 11

Coal mining

Q3 2013

The economic sentiment (1990-2010 average = 100) is a composite made up of 5 sectoral confidence indicators, which are arithmetic means of seasonally adjusted balances of answers to a selection of questions closely related to the reference variable. Source: Eurostat

Key Economic Data & Projections Indicator

2011

2012

GDP change

+4.5%

+1.9%

+1.6%

+3.1%

Consumer inflation

+4.3%

+3.7%

+0.9%

+0.1%

+0.9%

Producer inflation

+7.6% +3.4%

-1.3%

-1.0%

+1.1%

CA balance, % of GDP

-5.0%

-3.7%

-1.4%

-1.3%

-2.0%

Nominal gross wage

+5.2%

+3.7%

+3.4%

+3.5%

+4.0%

Unemployment**

12.5%

13.4%

12.2%

11.7%

4.12

4.19

4.20

4.17

4.09

EUR/PLN

2013

*2014

*2015

Sources: NBP, BZ WBK, PKO BP, GUS *) projections **) year-end

weekly newsletter # 056 / 13th October 2014 / page 15

56.15 ↑

100 SEK

45.66 ↓

100 NOK

50.61 ↓

10,000 JPY

USD EUR

350

300

15.20 ↓

100 CZK 10,000 HUF

400

305.52 ↑ 136.33 ↑

Money Supply May '14

Monetary base

162,246

173,096

557,651

572,376

M2 - Time deposits M3

WIG-20 stocks Price Change Change in alphabetical 10 Oct 3 Oct end of '14 order '14 '13

WIG Total index

Mar '14 Apr '14 May '14 Jun '14 Jul '14 Aug '14

119,649

4.4%

PLN (up to 5 y )

4.9%

4.8%

4.7%

4.8%

↓ Alior Bank

75.6

-9%

PLN (over 5 y)

4.7%

↓ Asseco Pol.

43.7

PLN (total)

4.7%

↓ Bogdanka

109

EUR (up to 1m EUR) 1.9%

2.0%

1.9%

1.7%

1.6%

↓ BZ WBK

380.5

-3%

-2%

EUR (over 1m EUR) 3.3%

3.0%

2.7%

3.4%

3.1%

2.5%

↑ Eurocash

32.19

+1%

-33%

WIG-20 blue chip index

↓ Grupa Lotos

28.82

+4%

-19%

Warsaw Inter Bank Offered Rate (WIBOR) as of 10 Oct 2014 Overnight

1 week

1 month

3 months

6 months

2.14%

2.10%

2.06%

2.05%

975,001 980,090 435,386 991,120

Rediscount

164,008

167,008

2.00%

3.00%

1.00%

2.25%

570,507

574,529

426,351

124,986

985,769 1,003,128 434,256

448,037

996,171 1,002,137 1,020,561

- Net foreign assets 142,260 144,033 152,864 162,129 Monetary base: Polish currency emitted by the central bank and money on accounts held with it. M1= currency outside banks + demand deposits M2= M1+ time deposits (inc in foreign currencies) M3= the broad measure of money supply Source: NBP

Change 1 week

-13%

4.5%

NBP deposit

122,209

-5%

-3%

4.4%

Lombard

120,828

-5%

4.4%

Reference

Jul '14

52,734.24 52,734.24

4.5%

Aug '14

Jun '14

-7%

PLN (up to 1 year)

-4%

-42%

2,392.62 2,392.62

-3%

-37%

Change 1 week

-2% ↓

↑ KGHM

124.9

+2%

+6%

Change end of '

0% →

↑ LPP

9,690

+8%

↓ mBank

475.2

-1%

-5%

WIG Total closing index

↓ Orange Pol.

10.43

-11%

+6%

last three months

179.05

-6%

20.65

27%

↓ Pekao

The financial sector's net lending in PLN bn,

↑ PGE

55,000 54,000

4.76

-6%

-8%

53,000

41.47

+1%

52,000

950,774

↓ PKO BP

36.25

-6%

-8%

50,000

274,549

277,482

↑ PZU

475.1

+1%

+6%

49,000

578,639

581,447

587,136

↓ Synthos

4.39

-4%

-20%

1,660,583 1,667,783

1,678,129

1,718,251

↓ Tauron

5.08

-2%

16%

Jun' 14

Jul' 14

Aug' 14

Loans to customers

930,652

940,703

939,641

- to private companies

273,360

276,709

- to households

574,800

Total assets of banks

56,000

↑ PKN Orlen

↓ PGNiG

May' 14

Type of loan

Source: Central Bank NBP

+3% ↑

24.06

Credit loan stock at the end of period

-2% ↓

Change end of '13

↓ Kernel

↓ JSW

Central Bank (NBP) Base Rates

in PLN m

- Currency outside banks

as of 10 October 2014

51,000

10 Oct 14

100 DKK

Warsaw Stock Exchange, rates in PLN

on loans to non-financial corporations

18 Sep 14

345.40 ↓

10 Oct 14

529.89 ↓

100 CHF

4 Aug 14

100 GBP

18 Mar 14

417.95 ↑

27 May 14

100 EUR

Key indices

Term / currency

450

9 Jan 14

329.85 ↑

25 Oct 13

100 USD

Stock Exchange

Average weighted annual interest rates

27 Aug 14

as of 10 October 2014

I nterest rates

11 Jul 14

100 USD/EUR against PLN

Central Bank average rates

4 Aug 14

Currency

Source: Warsaw Stock Exchange

Trade Poland's ten largest trading partners, ranked according to 2013

Poland exports and imports according to commodity groups, according to SITC classification EXPORTS in PLN bn Jan-Jul 2014

y/y (%)

share (%)

2013

EXPORTS in PLNbn

IMPORTS in PLN bn share (%)

Jan-Jul 2014

y/y (%)

share (%)

2013

share (%)

No Country

Jan-Jul share 2014

IMPORTS in PLN bn 2013

share No

Country

Jan-Jul share 2014

2013

Food and live animals

42,121

+6.3

10.7

69,304

10.9

28,562

+5.2

7.3

47,906

7.4

1 Germany

101,201 25.8% 162,548 25.1%

1 Germany

85,393 21.7%

Beverages and tobacco

5,724

+15.8

1.5

8,624

1.4

2,366

+2.8

0.6

4,150

0.6

2 UK

25,021

2 Russia

44,274 11.3% 79,578 12.1%

9,655

+3.6

2.5

15,744

2.5

12,436

-1.6

3.2

21,585

3.3

3 Czech Rep.

23,969

6.1%

40,110

6.2%

3 China

38,226 9.7%

16,270

-6.1

4.1

30,013

4.7

42,903

+3.3

10.9

75,539

11.7

4 France

22,469

5.7%

36,367

5.6%

4 Italy

21,433 5.5% 34,940 5.3%

Crude materials except fuels Fuels etc

6.4%

42,138

6.5%

142,161 21.7% 61,127 9.3%

1,115

+9.2

0.3

1,864

0.2

1,531

+04

0.4

2,646

0.4

5 Russia

17,355

4.4% 34,069

5.3%

5 Netherlands

14,647 3.7% 25,409 3.9%

Chemical products

36,076

+4.6

9.2

59,103

9.3

58,772

+6.5

15.0

92,917

14.3

6 Italy

18,212

4.6%

4.3%

6 France

15,374 3.9%

Manufactured goods by material

78,475

+3.1

20.0

129,915

20.3

70,529

+6.5

18.0

112,392

17.3

7 Netherlands

7 Czech Rep.

13,558 3.5% 24,054 3.7%

Machinery, transport equip.

150,231

+7.5

38.3

239,434

37.5

129,867

+3.7

33.1

216,608

33.4

8 Ukraine

n/a

18,020

2.8%

8 USA