MACROECONOMIC SITUATION IN 2015

According to European Commission projections, the Polish GDP is set to grow by 3.2% in 2015, at a rate similar to that reported in 2014. Domestic demand will remain the main driver of Polish growth in 2015. The growth of public investments is expected to step up owing to new projects co-financed with EU funds. The growth rate of private consumption is expected to stay strong thanks to the anticipated continuation of improvement on the local labour market.

As a result, Poland is expected to be the third fastest growing economy in the EU in 2015 after Ireland (3.5%) and Malta (3.3%). Economic activity in the eurozone, Poland’s main trade partner, is expected to recover gradually as its GDP grows by 1.3% in 2015 compared to 0.8% in 2014 (1.7% in 2015 and 1.3% in 2014 in the EU). Poland’s average annual inflation is expected to fall to -0.2% in 2015 (compared to -0.1% in the eurozone and 0.2% in the EU). The market consensus is that the Polish interest rates will continue to be cut in 2015.

The risk factors for the Polish economy in 2015 include the geopolitical risk posed by the escalation of the Russian-Ukrainian conflict including potential interruptions in the deliveries of Russian oil and gas to Poland as well as the impact of weaker market conditions in Russia and Ukraine on Polish exports.

Risks to the growth rate of private consumption in 2015 may include appreciation of the Swiss franc after the National Swiss Bank dropped the cap on the exchange rate of the franc against the euro, which inflated household debt in CHF.

Factors relevant to the financial markets in 2015 include the activity of the main central banks including the Fed’s potential decision to start a series of interest rate hikes. According to market consensus, the Fed should start to tighten the monetary policy in mid-2015 driven by continued economic recovery in the USA and further improvement on the US labour market.

Developments in Greece will be relevant to the financial markets in 2015, including collaboration of the new Greek government with the Troika (IMF, ECB, European Commission).

GEOPOLITICAL SITUATION IN EUROPE

Development of the geopolitical situation in Central and Eastern Europe will be relevant to the growth of the Polish capital market in 2015, including in particular potential escalation of the military conflict in Ukraine and political tensions between Russia and the European Union. The development of the conflict across Poland’s Eastern border will impact the Polish economy in 2015 but only in selected sectors, e.g., the food industry, the clothing industry, as well as selected companies listed on WSE which have a big exposure to trade in Russia and Ukraine. Risk factors to the activity of investors on the capital markets in Central and Eastern Europe include the economic and social situation in some European Union member states in view of the sovereign debt crisis and necessary structural reforms.

PRIVATISATION

The State Treasury of the Republic of Poland has played an important role in the development of WSE through privatisations. While the number of large companies available for privatisation falls steadily year after year, the State Treasury still holds significant blocks of shares in many companies already listed on WSE. The share of the State Treasury in the capitalisation of companies listed on WSE was 16.9% at the end of 2014.

The Ministry of the State Treasury earned privatisation revenues of PLN 1 bn in 2014. The biggest privatisation transaction was the sale of 65,411,629 shares of PGE Polska Grupa Energetyczna S.A. representing 3.50% of its share capital by the State Treasury in July 2014. The State Treasury raised PLN 121.5 mn on the sale and the company Polskie Inwestycje Rozwojowe S.A. received PLN 1.204 mn. The privatisation revenue expected in 2015 is estimated at PLN 1.2 bn.

The State Treasury may continue privatisations on WSE in 2015 and beyond, mainly be reducing its stake in companies already listed. The privatisation policy in the coming years will be determined among others by the continuation of the “Polish Investments” Programme. Revenues from sales of shares in some companies with a stake held by the State Treasury, which were designated for privatisation according to existing plans, could be used in the Programme. Under the Programme, as approved by the Council of Ministers on 27 December 2012, a part of stakes in several companies may be sold, including PGE Polska Grupa Energetyczna S.A., PKO BP S.A., PZU SA, after prior contribution to Bank Gospodarstwa Krajowego (BGK) and/or Polskie Inwestycje Rozwojowe S.A. (PIR S.A.) depending on the need for financing.

INTEGRATION OF THE ELECTRICITY MARKET: INTERNAL ENERGY MARKET

The objective of integration of the European market as a consistent harmonised internal market mechanism: the Internal Electricity Market (IEM), is to allow all market participants to participate in cross-border trade in electricity. The economic goals include maximisation of social welfare for market participants: customers, producers and cross-border interconnection owners (transmission grid operators), and energy price convergence in neighbouring markets. The target solution to ensure market coupling (MC) is the Price Coupling of Regions (PCR) model developed by Western European exchanges on the Day-Ahead Market and Cross-border Intra-day (XBID) model on the Intra-Day Market.

PolPX is preparing to become a full participant of the Multi Regional Coupling (MRC) market launched in May 2014 under the Price Coupling of Regions (PCR) model which currently includes Scandinavia, Central and Western Europe, and the Iberian Peninsula. Poland participates in the market in part, through a connection with the Scandinavian countries via the SwePol Link. In late August 2014, the Energy Regulatory Office and the Polish Power Grid Company agreed joint actions to cover all cross-border interconnections by the Market Coupling mechanism based on the PCR model, including PL-LT, PL-DE, PL-CZ and PL-SK interconnections.

PolPX plans to be a full member of PCR and to operate on the MRC market at first as Nominated Electricity Market Operator (NEMO) and soon thereafter also as periodic Market Coupling Operator (MCO) of the single European market. These functions are described in the draft Capacity Allocation and Congestion Management Regulation (CACM). The final wording of the Regulation is currently under discussion. CACM should be published and take effect in early 2015.

GAS MARKET: GAS SUPPLY DIVERSIFICATION REGULATION

The Regulation of the Council of Ministers of 24 October 2000 on minimum diversification of gas supplies from other countries provides that the maximum share of gas imported from one country of origin in the total volume of gas imported within the year shall not be more than 59% in 2015-2018 and 49% in 2019-2020. The provision applies to energy companies which have been or will be issued a licence to trade in natural gas with other countries.

In its current wording, the regulation hinders the operation of energy companies trading in gas both in economic and technical terms as they are forced to purchase more expensive gas from less accessible sources.

The diversification obligation also applies to LNG supplies to the Świnoujście terminal, which may hinder its full utilisation as traders will have to diversify non-EU LNG supplies using non-EU natural gas supplies.

The regulation has not been harmonised with EU legislation since Poland’s EU accession. In December 2014, the Ministry of the Economy announced that the draft new regulation is to be tabled to the Council of Ministers before opening inter-ministerial and social consultations.

Amendment of the regulation in 2015 will certainly contribute to the development of the exchange market in gas, the entry of new players, and additional competition.