Risks characteristic to foreign markets

In Hungary, there is still a risk of a decrease in the level of consumption and household spending linked to the risk of the economic recession continuing or deepening. In 2023, according to estimates of the Hungarian Central Bank (MNB), GDP was between -0.6 and -0.4% y/y1.  MNB forecasts for 2024 indicate that economic growth will be between 2.5 and 3.5%, while the European Commission predicts growth of 2.4% y/y2.

The prolonged lack of agreement between the Hungarian government and the European Commission regarding the National Reconstruction Plan remains a significant risk for the economy. Hungary, right after Poland, is the largest net beneficiary of EU funds.

Another important risk is Hungary’s attitude to Russian aggression in Ukraine, which may result in a deeper isolationism of the country within the European Union. Hungary was the only EU country to reject sanctions against Russia, banned arms deliveries to Ukraine through its territory, and is still reluctant to provide EU financial assistance to Kiev and to continue Ukraine’s accession process to the EU3.

1 Source: Magyar Nemzeti Bank, Inflation Report (December 2023), https://www.mnb.hu/letoltes/eng-ir-digitalis-23.pdf.

2 Source: European Commission, Economic forecast for Hungary, November 2023, https://economy-finance.ec.europa.eu/economic-surveillance-eu-economies/hungary/economic-forecast-hungary_en

3 Source: https://camiso.org.pl/aktualnosci/article/wegry-wobec-czlonkostwa-ukrainy-w-unii-lepszej-opinia/.

The major risks related to the Ukrainian market stem from military operations.  In response to the invasion of Russian Federation troops into Ukrainian territory, Kiev declared martial law and general mobilization. As at the date of the publication of the Report, fighting continues chiefly in the north, east and south-east of the country.  In addition, bombings are carried out on many Ukrainian cities not yet involved in combat, as well as sabotage and subversive activities.

The political and economic situation in Ukraine is monitored on an on-going basis by the Group as regards the actual and potential impact of the situation on the activities of the subsidiary Śnieżka-Ukraina and other Group companies.

The Company estimates that currently there are no indications that would indicate a permanent loss of the possibility of continuing business activities in Ukraine.  The exposure to risk of assets held in Ukraine as at December 31, 2023 is presented in item 8.2.9 of the Report.

Due to the on-going war in Ukraine, there were external indications indicating the need to conduct impairment tests for non-current assets located in Ukraine in accordance with IAS 36 „Impairment of assets”.
Following the test, a result was obtained indicating no impairment of non-current assets. The assumptions adopted by the Group regarding the test are detailed in the Consolidated Financial Statements for 2023 in note 2.2.7.

The fixed assets of Śnieżka-Ukraina are located in the Lviv region, Yavoriv district, not far from the Polish border. According to the information held by the Company, the assets of this company are currently not at risk. Śnieżka-Ukraina has production capacity at the pre-war level, and one of the major challenges, it is currently facing, is ensuring the continuity of raw material supplies.

Despite rebuilding cooperation with its partners from areas of Ukraine not affected by warfare and better than expected sales revenues in the entire 2023, the on-going armed conflict in this country has a significant impact on the Śnieżka-Ukraina’s bottom line and translates into the performance of the entire Group .

Still in Q1 of the previous year, the country was affected massive missile attacks on critical infrastructure, which in the case of the paints and varnishes industry resulted in unstable operation of production plants due to power cuts.  In the following quarters, missile attacks were significantly less intense. Nevertheless, the Company recognizes the risk of increasing the scale of attacks, which may result in repeated disruptions in energy supplies at the production plant, affecting the operational efficiency of Śnieżka-Ukraina. These disruptions may also have a negative impact on citizens’ renovation plans and, consequently, on a decline in demand.

Military operations hinder the supply of the Group’s products. It cannot be completely ruled out that a possible escalation of the armed conflict in other regions of Ukraine may influence the decision to close the Ukrainian production plant again. Śnieżka-Ukraina manages the volume of production and sales on an on-going basis, adjusting them to the changing circumstances in Ukraine.

The consequences of military operations on the current macroeconomic situation in Ukraine is described in item 5.1 of the Report, and its impact on the paints and varnishes market in this country – in item 5.3.

A specific risk for the Belarusian market is still the unstable socio-political situation, which affects the conditions for doing business. The Śnieżka Group, operating on the Belarusian market, must bear in mind the possibility of situations that may adversely affect its bottom line and assets located in the territory of Belarus.

There is a risk that the policy pursued by the Belarusian authorities will contribute to further sanctions imposed by the European Union, which will result in the reduction in exports, the fall of Belarus’ GDP1 and a further increase in currency risk (devaluation of the Belarusian ruble).

Another risk specific to Belarus is economic protectionism – activities carried out by the government to protect the domestic market against the influx of imported goods (customs duties, permits or expensive certificates).  The actions of the Belarusian authorities may have significant restrictions in trade with the European Union the countries, including Poland, and accelerate the pace of integration with Russia.

In addition, the risk factors encompass consequences of Belarus’s membership of the Eurasian Customs Union (i.a. Russia), including the related expansion to the Belarusian market of Russian manufacturers of construction materials.

Due to the introduction of further legal restrictions in Belarus, there were external premisses indicating the need to conduct impairment tests for fixed assets located in Belarus in accordance with IAS 36 „Impairment of assets”.
Following the test, a result was obtained indicating impairment of non-current assets. Therefore, in the Report for 2023, the Group recognized an impairment loss on these assets. The assumptions adopted by the Group regarding the test are detailed in the Consolidated Financial Statements for 2023 in note 2.

1 Source: https://www.osw.waw.pl/pl/publikacje/analyzy/2021-11-08/bialorus-fenomen-powiedzowego-wzrostu-gospodarczej and https://www.osw.waw.pl/pl/ publications/osw-comments/2023-03-22/crisis-not-disaster-belarusian-economy-a-year-after-Russian