MACROECONOMIC SITUATION IN 2014

Poland’s economy grew by 3.3% in 2014 according to preliminary estimates of the Central Statistical Office (GUS), compared to 1.7% in 2013. The Polish economy in 2014 was driven by domestic demand: private consumption and investments, while foreign demand made a negative contribution to GDP growth. Inflation fell sharply in Poland in 2014. Starting in July, annual inflation was negative and remained well below the NBP inflation target (2.5%). Lower inflation was due to a declining growth rate of fuel prices, food prices, and core inflation. The Monetary Policy Council cut the interest rates by 50 basis points to a record low of 2.0% in October 2014. Falling inflation pressures as well as expectations of monetary policy easing by the Monetary Policy Council combined with an expansive monetary policy in the eurozone caused the yields of Polish Treasury bonds to fall to a historical low in 2014 (by ca. 180 basis points to 2.5% for 10Y bonds). The Polish currency depreciated on the local fx market due to the collapse of the Russian rouble and growing risk aversion against emerging markets in view of the Russian-Ukrainian conflict.

The global economy in 2014 saw a sharp decrease of commodity prices, mainly a sudden decline of oil prices. As a result, annual inflation was below the zero mark in many countries including in the eurozone and Central and Eastern Europe. The low commodity prices had a positive impact on growth in those countries which are net importers of commodities as real disposable income of households increased. However, a long period of very low or negative inflation adds to the risk of even lower inflation expectations and higher real interest rates.

Weaker inflation pressures, rising expectations that the ECB will initiate a purchase programme of Treasury bonds of eurozone countries, and delayed Fed interest rate hikes resulted in a major fall in Treasury yields in the eurozone and the USA (the yields on 10Y German bonds were record-low at 0.5%, the yields on 10Y US bonds were around 2.0%).

In 2014, the main central banks continued to pursue an expansive monetary policy, keeping the interest rates at historically low levels. The differences in the economic situation between the USA and the eurozone implied a divergence of the monetary policy cycles between their economies. The Fed closed a five-year quantitative easing programme in late 2014. The ECB, however, decided in 2014 to continue monetary easing including interest rate cuts and as asset purchase programme. As a result, the US$ appreciated strongly against the EUR in 2014.

LOW VOLATILITY AND PARALLEL TREND OF STOCK PRICES

The volatility of stock prices on the WSE Main Market was relatively low in 2014. The volatility ratio of WIG20 was 14.8%, one of the lowest ratios in WSE history. Furthermore, the main WSE indices (WIG and WIG20) remained within a narrow band of lateral trend throughout 2014: WIG ranged from 49,520 points to 55,637 points while WIG20 ranged from 2,271 points to 2,551 points. These factors largely curbed the propensity to invest capital on WSE in 2014 and reduced the activity of investors on the equity and derivatives markets, resulting in a decrease of WSE revenue from trading on those markets. 

WIG20 volatility ratio^[1]

[1] Standard deviation of daily return rates of the index annualised with the square root of 250. 

PENSION FUND REFORM

The 2014 pension fund reform in which 51.5% of the net assets of pension funds, mainly Treasury bonds, were moved to the Social Security Institution (ZUS) and then cancelled, affected the sentiment of local and international WSE investors, in particular as concerns future inflows of assets to pension funds and, consequently, further potential inflows or outflows of pension fund assets to/from WSE.

Following the reform, more than 2.5 million Poles decided to transfer part of their pension contributions with open-ended pension funds while the net asset value of pension fund portfolios was PLN 149.1 bn at the end of 2014.^[2] The reform also set the minimum investment of pension funds in stocks at 75% of assets by the end of 2014, 55% by the end of 2015, 35% by the end of 2016, and 15% by the end of 2017. In addition, the reform bans pension funds from investing in Treasuries, which on the one hand limits liquidity on the domestic market of Treasury securities and on the other hand makes pension funds more interested in investing in non-Treasury bonds.

[1] PFSA data.

GEOPOLITICAL SITUATION IN EASTERN EUROPE

The military conflict in Eastern Ukraine which started in Q1 2014 increased uncertainty about the political stability of the region among international investors who invest on Central and Eastern European capital markets. Poland is part of the popular investment basket of Emerging Markets Europe, hence the conflict across the Eastern border had an adverse impact the activity of investors on WSE.

OBLIGATION TO TRADE IN GAS ON THE EXCHANGE

The obligation to sell on the exchange a proportion of high-methane gas put in the transmission grid from imports and domestic production imposed by the Energy Law took effect on 11 September 2013. In 2014, the proportion was 40%; based on the annual volume of sales at 16.1 bn m³ in 2013 according to POGC publications, the volume subject to the obligation is ca. 6.5 bn m³ (70 TWh). The proportion will be 55% as of 2015.

In its second year of operation, the PolPX gas market performed much better in terms of the trade obligation (in the first year of the obligation, gas offered on PolPX did not find enough buyers). The improved performance of the obligation in 2014 was largely due to changes in the POGC Group structure where wholesale and retail operations were separated. A new company, PGNiG Obrót Detaliczny Sp. z o.o., launched on 1 August. It buys natural gas on PolPX and supplies it to 6.5 mn retail consumers, households and companies whose annual gas consumption is less than 25 mn m³ per year. Gas is sold on PolPX by PGNiG Oddział Obrotu Hurtowego, which also supplies natural as to users whose annual gas consumption is more than 25 mn m³ per year under bilateral contracts.