1. 1 The impact of the recent crisis on the Polish economy and 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 crisis Athens, October 16, 2009

2. 2 With GDP growth of 1.1% in Q2 09, Poland is a bright spot in recession-hit Europe

3. 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. 4 Despite significant slowdown, GDP growth in Poland remains positive…

5. 5 …which distinguishes us from other European economies

6. 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)

7. 7 The outflow of portfolio capital was coupled by a fall in FDI…

8. 8 … and strong exchange rate depreciation Increase denotes depreciation

9. 9 The exchange rate acted as a shock-absorber changing the structure of domestic demand 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

10. 10 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. 11 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 Nonresident interbank funding NBP’s „confidence package” funding

12. 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.

13. 13 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. % Reference rate

14. 14 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.

15. 15 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