Macroeconomic factors which can affect the operations of the Polish insurance sector and PZU Group’s activities in 2017

We expect that 2017 will be better than 2016 for the growth of the Polish economy, and thus also for the insurance industry.

The GDP growth can amount to approximately 3.5%. Entering the implementation phase of the investments co- financed with EU funds will be of key importance. It will allow to revive investments in a significant way and, with a steady, solid growth in consumption, to boost the GDP growth. Improvement of external conditions – foremost, a bigger growth of global trade turnover and a better situation in the global industry – should help Polish exports and industrial production. Our forecast assumes that the labor market situation will continue to improve. However, the increase in employment and a decline in the unemployment rate will be slower than in 2016 – due to the fact that Poland is getting close to the state of „unemployment equilibrium” and limits of labor supply. The increase in inflation may be the signal for the increase in remuneration pressure.

It seems that the biggest risks for this scenario are related to the external situation. The most dangerous risk seems to be related to a rise of protectionism in the global economy, which would lead to a slowdown in world trade and GDP. There will be a series of elections in the major EU countries in 2017, which means a potential threat to preservation of coherence of the European Union, and, furthermore, for sure – a temporary increase in uncertainty associated with said elections. It is difficult to fully predict economic and market consequences of the probable strategy of „hard Brexit”. Risks associated with the problems of European banks and Greece also remain relevant. Higher US interest rates and a strong dollar increase the risk of financial turmoil in emerging markets. The risk of a financial crisis in China, as well as geopolitical risks, still remain. Internal factors which could limit the growth of GDP include such issues as an increasingly noticeable problems with recruiting suitable employees, a possible prolonging of stagnation in private investments, or a sharper than expected rise in inflation, eroding real revenues of households.

Inflation will increase rapidly at the beginning of 2017 in response to a gradual disappearing of the effects of a sharp fall in fuel prices (and, partially, food) in the previous year and its annual average may amount to approximately 2% year-on- year. We expect stabilization of the NBP interest rates in 2017. The prospect of the NBP real negative reference rate, with accelerating GDP growth, especially at the end of 2017, will force the Council to consider increasing the interest rates.

We estimate that the state budget deficit and the general government deficit (2.9% of GDP) planned for 2017 can be implemented – especially with a probable buffer in the form of another, much higher than expected payment from the profit of NBP. In the context of the deficit of the entire sector, the risk is associated with an increase in the deficit of local governments due to the beginning of their investments. At the same time, the implementation of the announced transfer of 25% of the funds from the Open Pension Funds to the Demographic Reserve Fund would temporarily help to reduce the general government deficit below 3% of GDP.

The prospect of higher inflation and economic growth should promote the growth of government bond yields, which in the long term is beneficial for PZU Group, although in the short term it may adversely affect the investment income. However, there are many risk factors which will increase the volatility of financial markets in 2017. Political decisions or election results in key EU countries, which are difficult to predict, may turn out to have particularly painful effects. They may significantly change the outlook for the various asset classes in the financial markets.