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M. Singer – Czech Republic: Future challenges and opportunities 1 M. Singer – Present...

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M. Singer Czech Republic: Future challenges and opportunities 1 M. Singer Present Conditions, Monetary Policy and Outlook in Czech Republic 1 M. Singer - Czech Republic: Staying Ahead of the Curve with Regard to Monetary Policy 1 M. Singer: The economic and financial crisis from the point of view of the Czech banks 1 M. Singer: Financial Crisis: Impacts on the CR and Lessons for the Supervisors 1 M. Singer: Financial Crisis: Likely Impacts on the CR and Lessons for the Supervisors M. Singer: Present Conditions, Monetary Policy and Outlook for CR 1M. Singer: Consumer protection in financial services: CNB approach 1 The Czech Republic: Future challenges and possible risks OECD, Seminar 20 Years After Paris, 20 November 2009 Miroslav Singer Vice-Governor, Czech National Bank Slide 2 M. Singer Czech Republic: Future challenges and opportunities 2 Economic performance of Czech economy during crisis CNB forecast Challenges and possible risks Contents Slide 3 M. Singer Czech Republic: Future challenges and opportunities 3 GDP growth: q-o-q Technically, the recession stopped in 2009 Q2 Source: CZSO Slide 4 M. Singer Czech Republic: Future challenges and opportunities 4 Cumulative GDP q-o-q growth: 3Q2008-2Q2009 (not seasonally adjusted) The cumulative q-o-q GDP decline in the Czech Republic was comparable with the EU-27 average Source: Eurostat, own computation Slide 5 M. Singer Czech Republic: Future challenges and opportunities 5 Manufacturing Source: CZSO The decline in manufacturing output seems to have bottomed out in mid-2009 Slide 6 M. Singer Czech Republic: Future challenges and opportunities 6 Exports, imports and trade balance Exports, imports and trade balance (annual percentage changes; percentage points; constant prices; seasonally adjusted data) Source: CZSO The decline in total foreign trade turnover was still marked in 2009 Q2 Slide 7 M. Singer Czech Republic: Future challenges and opportunities 7 Inflation (y-o-y in %) Annual inflation fell towards zero in 2009 Q3 Source: CZSO Slide 8 M. Singer Czech Republic: Future challenges and opportunities 8 CZK/EUR (1 Jan 2007-17 Nov 2009) After appreciating in July 2008 and depreciating in February 2009, the koruna has returned to its previous trend Source: Eurostat Slide 9 M. Singer Czech Republic: Future challenges and opportunities 9 CNBs key rates Source: CNB To deal with the strong disinflationary pressures, the CNB has lowered its interest rates to a record low Slide 10 M. Singer Czech Republic: Future challenges and opportunities 10 State budget balance The economic crisis and earlier fiscal measures are reflected in a deteriorating state budget balance (vs. surpluses in 2007 and 2008) Source: Ministry of Finance Note: GFS 1986 Slide 11 M. Singer Czech Republic: Future challenges and opportunities 11 Loans to non-financial corporations and households (y-o-y change in %) Loans to non-financial corporations declined year on year for the first time since 2005 Source: CNB Slide 12 M. Singer Czech Republic: Future challenges and opportunities 12 Newly extended loans (y-o-y change in %) Source: CNB New loans to non-financial corporations and households decreased Slide 13 M. Singer Czech Republic: Future challenges and opportunities 13 Non-performing loans (% of total loans in segment) Source: CNB Non-performing loan ratios rose most significantly in non-financial corporations Slide 14 M. Singer Czech Republic: Future challenges and opportunities 14 Summary Financial and economic crisis was imported into Czech Republic Czech economy was slightly overheated before crisis, but generally at macroeconomic equilibrium (low inflation, anchored expectations) Monetary-policy and macroeconomic framework (inflation targeting and managed float) provided economy with necessary adjustment mechanisms own currency proved to be advantage in crisis Main cause of vulnerability of economy: high export dependence Domestic banking sector was in good condition before crisis: banks were well capitalised and profitable (negligible share of toxic assets) Financial sector did not amplify impacts of crisis on economy and will not be source of major risks going forward Stress tests: strong resilience, profitability, sufficient capital adequacy The Czech economy is currently coping with the crisis better than many other advanced European countries Slide 15 M. Singer Czech Republic: Future challenges and opportunities 15 CNB Forecast (November 2009) Slide 16 M. Singer Czech Republic: Future challenges and opportunities 16 GDP growth forecast GDP growth forecast (annual percentage changes; seasonally adjusted) Source: CNB After a decline in economic activity this year a moderate recovery will take place in late 2009 and early 2010 Slide 17 M. Singer Czech Republic: Future challenges and opportunities 17 Headline inflation forecast Headline inflation forecast (annual percentage changes) Source: CNB At the monetary policy horizon, the headline inflation forecast is slightly above the inflation target Slide 18 M. Singer Czech Republic: Future challenges and opportunities 18 Main uncertainties in short run What will course and intensity of recovery look like internationally and in Czech Republics major trading partners? W-shaped? How strong are disinflation pressures (external inflation, nominal wages, domestic demand)? How will Czech public finances develop in 2010 and 2011? How will koruna exchange rate develop? How effective is monetary policy transmission mechanism? Huge uncertainty still surrounds economic developments and monetary policy-making going forward Slide 19 M. Singer Czech Republic: Future challenges and opportunities 19 Challenges and possible risks Domestic: Fiscal policy External: Protracted and painful recovery in Europe Hasty supervision and regulation changes Slide 20 M. Singer Czech Republic: Future challenges and opportunities 20 High share of mandatory or quasi-mandatory expenditures in total expenditures (above 70%) No pension reform or healthcare reform (ageing!) Lack of transparency in budgetary process Atomisation of public budgets Lack of audit of state funds Despite significant steps approved recently by parliament, the fiscal area represents the most serious macroeconomic risk going forward (persisting deficits even in good times and rapid growth in debt) Long-neglected fiscal problems Slide 21 M. Singer Czech Republic: Future challenges and opportunities 21 Public finance deficits Source: CNB computation, November 2009 forecast Public finance deficits will fluctuate between 5% and 6% of GDP over the next few years Note: ESA 95 Slide 22 M. Singer Czech Republic: Future challenges and opportunities 22 Public debt (as % of GDP) After a period of stability public debt is expected to grow rapidly after 2008 Source: CNB computation, November forecast Slide 23 M. Singer Czech Republic: Future challenges and opportunities 23 GDP (2000 = 100) The longer term danger for Europe is still its too sluggish growth Source: Eurostat Slide 24 M. Singer Czech Republic: Future challenges and opportunities 24 Current problems in financial market supervision Planned European Systemic Risk Board at ECB and European financial supervision system may blur division of labour among existing supervisory authorities Instead of precisely defining and identifying causes of crisis, illusion being created that more supranational supervision and regulation is guarantee against future repetition of crisis Risk: if supervision is distanced from national level, current unsatisfactory state of affairs will deteriorate even further Other topical issues put on back burner (cost-sharing) Overregulation of the sector may further decrease the EUs growth potential. The past problems of Czech banks impacted fairly on Czech taxpayers, but in the future external problems might impact on them through no fault of their own! Slide 25 M. Singer Czech Republic: Future challenges and opportunities 25 Five violated principles what the current plans neglect/worsen 1.Uncertainty is fundamental (diversifying supervisory/regulatory policies reduces risks arising from fundamental uncertainty) 2.Positive motivation (eliminated value of banking licences for shareholders and profitability of traditional areas of banking) 3.Unpredictable response (regulated/supervised entities always react [rather] differently than reformers intend) 4.Communication of costs (costs often not even discussed at expert level, never mind communicated by politicians to voters) 5.Manageable number of institutions (any unification, or even just improvement of coordination, of supervisory/regulatory institutions at European level requires progress with integration of 80 or so institutions at national level) Slide 26 M. Singer Czech Republic: Future challenges and opportunities 26 Conclusions Risk of long-term fiscal inaction (structural deficit) currently being compounded by economic decline (cyclical deficit) and potentially by political stalemate in future Due to high export intensity of the Czech economy a sluggish recovery in Europe will impose an impediment on domestic recovery Hasty changes in financial market regulation and supervision may present future risks to financial stability of Czech economy (any mistakes in globalised supervision could be far-reaching and could even trigger new crisis) or to the growth in Europe. While the fiscal risk is domestic (and therefore influenceable), the risks of pan-European supervision are external (and therefore hard to influence) Slide 27 M. Singer Czech Republic: Future challenges and opportunities 27 Thank you Miroslav Singer [email protected] Tel: +421 224 412 008 esk nrodn banka Na pkop 28 115 03 Praha 1

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