Czech convergence and impact of world economic crises on Czech republic Ludek Niedermayer Director,...

Czech convergenceand impact of world economic crises on Czech republic

Ludek NiedermayerDirector, Consulting, Deloitte CRDecember 2009

Czech convergence(pre crises)

3 © 2009 Deloitte Czech Republic

Success story, mainly in this decade

Since start of this decade, very strong performance of Czech economy

GDP in euros has doubled, macro stability was preserved

Inflation was volatile but low, CA has been supported by surplus of in foreign trade

The key weakness was in the area of publics policies

Even with around 5% growth of GDP, the budged was not able to reach „close to balance“

Total debt has increased to around 30% of GDP, but declining IR helped to hold cost of debt service low

19971998 1999200020012002 2003200420052006 200720080

2

4

6

8

10

12

0

50

100

150

200

250

Inflation

GDP (USD)

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0

20

40

60

80

100

120

140

160

0

5

10

15

20

25

30

35

40

45

GDP (Euro)

Debt (Euro)


FX played role

Exporters handled stress wellLow inflation was reached mainly via exchange rate channel (and flexibility of the economy)

CZK was gradually appreciating against euro, the key currency for export and import (ex energy)

The economy was able to withhold appreciation of REER in this decade without creating large fragilities

With passing time, the „depreciation cushion“ from start of the reform was fading away, some types of the production are not possible to do at the Czech prices – economy is gradualy changing structure

Volatility of the currency is recently of more concern, as part of the economy is supplying to very competitive markets

Recovery on the way? Impact of world economic crises on Czech republic and region

1/1/

1993

1/10

/199

3

1/7/

1994

1/4/

1995

1/1/

1996

1/10

/199

6

1/7/

1997

1/4/

1998

1/1/

1999

1/10

/199

9

1/7/

2000

1/4/

2001

1/1/

2002

1/10

/200

2

1/7/

2003

1/4/

2004

1/1/

2005

1/10

/200

5

1/7/

2006

1/4/

2007

1/1/

2008

1/10

/200

8

1/7/

2009

20

24

28

32

36

40

ECU/EUR

ECU/EUR Linear ( ECU/EUR)

1/3/

1996

1/3/

1997

1/3/

1998

1/3/

1999

1/3/

2000

1/3/

2001

1/3/

2002

1/3/

2003

1/3/

2004

1/3/

2005

1/3/

2006

1/3/

2007

1/3/

2008

1/3/

2009

60

70

80

90

100

110

120

130

Období REER - deflator GDP (FT turnover, 2005=100

5 © 2009 Deloitte Czech Republic Recovery on the way? Impact of world economic crises on Czech republic and region

Summary : The economy is strong in macro stability and private sector, publics sector policies is lagging behind

• The key bottle necks of ČR

• Weak fiscal situation, the fast growth of revenues was hiding the budgetary problems and was transformed into permanent expenditures

• Reform of pension system did not take place

• Just small changes in health care, underestimated impact of demography

• No euro strategy, ideology instead of pragmatism

• EU „schizophrenia“

• The crises also has shown up, the potential role of the government in the economy is larger than expected, and so the quality of publics service matters a lot…

• Relatively strong external position (BoP and publics external debt) of ČR

• There are some macro fragile countries in the region, the others were partly affected by regional sentiment

• Good indicators of financial stability (loan to deposit ratio, FX lending, FX financing)

• Asset bubbles not too evident

• In some countries, high proportion of FX lending, in some cases also impact of weakness on the „owners“

• But still, impact of the slow down visible everywhere (asset quality decline, temporary increase of fiscal deficits)

• All countries in the region do suffer from large deficits, practically in no cases financial system was collapsing


Czech EU / Euro debate

Combination of:

Strong growth

Low nominal IR

CZK excellent for storage of value

Skepticism of some parties about EU

Low willingness to consolidate publics finance

Lead to no enthusiasm about Eurozone entry

Even worse, the plan of social democratic government (2009 or 2010) was canceled as part of pre election campaign

But due to the structure of the economy, the euro adoption is not as indifferent, as some economists think.


1/1/

1995

1/1/

1996

1/1/

1997

1/1/

1998

1/1/

1999

1/1/

2000

1/1/

2001

1/1/

2002

1/1/

2003

1/1/

2004

1/1/

2005

1/1/

2006

1/1/

2007

1/1/

2008

1/1/

2009

0

5

10

15

20

25

30

35

40

45

2WK

3M

1Y

0

1

2

3

4

5

6

7

8

5Y Bond

30Y Bond

Czech economy dealing with crises


From Golden years to crises

• Czech economy before crises reached most likely peak of the cycle

• Fast CZK appreciation in 1H of 2009 created large problems for economy

• Economy – private or publics - was totally unprepared for crises

• And politicians tried to play it down at the beginning

• The result for 2009 GDP would be close to 5% decline, instead of 5% average growth before the crises

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

-10

-5

0

5

10

15

20

25

GPD CRCapital formation CRExports CRConsumption CR

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

GDP bil. CZK


Czech recession

• Delayed start, but than large impact

• Wrong assumption (of the politician) about relative safety of the economy

• Strong link to EU market (cars and EU exports)

• High export to GDP proportion, high concentration

• Citizens affected by information similarly to any other country

• Small space for government policy

• Small countries have per se limited options, domestics demand stimulation does not work

• On the contrary, mainly for „floaters“, the macro stability is key priority

• The hypotheses, that “new countries“ will be less affected, did not work. The output losses will be substantial.

• In selecting government policies, not the stimulation of demand, but the support of eemployment is the key measure

• In Czech, situation was complicated by political crises

• Since 2Q, there are signs of stabilisation of economy. Recovery could be slower than expected, pre crises growth is “unlikely to be reach soon (if ever)“


Crises – permanent loss of „value“ – read figures properly


2006 2007 2008 2009 2010 2011 2012 201385

90

95

100

105

110

GDP

Crises Turning point Slower, post crises growth

Back on trend (not always)

LossPre crises growth


Deficit growth – money are gone

• More of debt means also higher interest rates and thus problem for next budgets

• The impact of “not good policy” can be as high as 30 bil. (almost 1% of GDP) for all future budgets

• Reaching 60% of GDP debt means permanent increase of debt service of 70 bil. at current prices

• Comparison (data 2008)

• Social transfers – 54 mld.

• Defence budget – 54 mld.

• University expenditures – 26 mld.

• So far there is no awareness of politicians of possible problem

• Adjustment 1% (GDP) per year is for most of them too aggressive

0

20

40

60

80

100

120

Debt service

Current "debt“ 30% GDP, interest 4%

2011 optimistic (40% / 5%)

Higher interest rates(6%)

60% debt, at 5%


Short term outlook

State of global economy better than expected, the financial sector is not great concern

The world recovery should help to get Czech economy back to growth

In the short run, the investments, construction and mainly labor market will slow down Czech recovery

Inflation in near term not source of concern, but longer horizon is less clear

Still, being among the first countries starting with fiscal consolidation is good, the measures taken are less good (and changes are even worse)

Even in medium run, the potential of the economy is much lower than before crises

So the policies must be adjusted to this fact

• Nevertheless, it seems that competitive position of the economy is preserved, but it is one of the „most expensive“ in the region

• The problem is over capacity generated by global decline of the economy, so even relatively competitive countries will benefit just partly from this position

• The situation can improve, but still, it is not clear, where is world heading

Crises and CZK or Euro (my view)


Floating CZK – great helper ?

• Weaker CZK helps. More volatile no

• Look at past

• From mid 2007 to mid 2008, CZK has appreciated from 28 to 23

• The wage cost in Euro has increased in magnitude of 25% during 12 month

• This episode has weakened the Czech compatibility before the crises substantially

• Since start of the crises

• Depreciation reached max of 25%, volatility high

• Now, CZK has corrected the stronger level, but volatility is still hign

• Interest rates higher, but not much

• Hedging for exporters is difficult and expesive

• Euro is still (even more) priority for economy

1/1/

2007

1/4/

2007

1/7/

2007

1/10

/200

7

1/1/

2008

1/4/

2008

1/7/

2008

1/10

/200

8

1/1/

2009

1/4/

2009

1/7/

2009

1/10

/200

923

24

25

26

27

28

29

30

ECU/EUR

ECU/EUR

1/1/

2007

1/4/

2007

1/7/

2007

1/10

/200

7

1/1/

2008

1/4/

2008

1/7/

2008

1/10

/200

8

1/1/

2009

1/4/

2009

1/7/

2009

1/10

/200

92

2.5

3

3.5

4

4.5

5

5.5

6

5Y Bond

30Y Bond


Impression from the crises

• Very similar impact of the crises to all „new member states“ (apart of Poland)

• Mainly among floaters different experience with FX regime:

• Poland and Czech seems happy with their choice, Hungary (and maybe Romania) would benefit from euro greatly

• Also impact on banking sector very different. In some countries (mainly Hungary), FX regime triggered large euro-isation of the banking balance sheets

• Nevertheless, the lessons (especially partial) from the event happening once in decades is not good base for evaluation of the euro adoption

• Some more universal facts should be taken into account:

• High growth in new members states has reduce gap between them and rest of EU. Adoption of the euro is less risky

• Links between new and old Europe are stronger, so the risk of asymmetrical shocks is lower

• Crises have shown, that cost of volatility is higher than expected and due to lower liquidity of the markets the hedging is more costly

• So in my option, in most cases, Euro in more appealing than before



Desirable or feasible ?

(yes and no, likely)

In most of the new member states, the period of the robust growth was not used for consolidation of fiscal policy

And in some cases, fiscal policy was pro cyclical

While is should be relatively easy to consolidate after the crises, the politicians have different view

So fiscal can be major obstacle

While inflation can be also problem, the other key concern is continuing believe of some Eurozone members, that enlargement can undermine the credibility of the euro


1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

-7

-5

-3

-1

1

3

5

7

-7

-5

-3

-1

1

3

5

7

GDP (%) Fiscal deficit (% GDP)

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/cz/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms.

Member of Deloitte Touche Tohmatsu

© 2009 Deloitte Czech Republic

http://www.deloitte.com/cz/about

Date post:	26-Dec-2015
Category:	Documents
Upload:	barbara-powers
View:	213 times
Download:	0 times

Czech convergence and impact of world economic crises on Czech republic Ludek Niedermayer Director,...

Documents