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Page 1: M. Singer – Czech Republic: Future challenges and opportunities 1 M. Singer – Present Conditions, Monetary Policy and Outlook in Czech Republic 1 M. Singer.

M. Singer – Czech Republic: Future challenges and opportunities 1M. Singer – Present Conditions, Monetary Policy and Outlook in Czech Republic 1M. Singer - Czech Republic: Staying Ahead of the Curve with Regard to Monetary Policy 1M. Singer: The economic and financial crisis from the point of view of the Czech banks 1M. Singer: Financial Crisis: Impacts on the CR and Lessons for the Supervisors 1M. Singer: Financial Crisis: Likely Impacts on the CR and Lessons for the SupervisorsM. Singer: Present Conditions, Monetary Policy and Outlook for CR 1M. Singer: Consumer protection in financial services: CNB approach 1

The Czech Republic: The Czech Republic: Future challenges and Future challenges and

possible risks possible risks

OECD, Seminar “20 Years After”Paris, 20 November 2009

Miroslav SingerMiroslav Singer Vice-Governor, Czech National BankVice-Governor, Czech National Bank

Page 2: M. Singer – Czech Republic: Future challenges and opportunities 1 M. Singer – Present Conditions, Monetary Policy and Outlook in Czech Republic 1 M. Singer.

M. Singer – Czech Republic: Future challenges and opportunities 2

• Economic performance of Czech economy during crisis

• CNB forecast • Challenges and possible risks

ContentsContents

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M. Singer – Czech Republic: Future challenges and opportunities 3

GDP growth: q-o-qGDP growth: q-o-q

Technically, the recession stopped in 2009 Q2

Source: CZSO

0,9

1,61,2

0,50,1

0,71,0

0,00,50,5

0,1

1,11,21,2

0,3

1,3

0,7

1,41,51,2

1,81,71,61,81,71,9

1,61,4

2,5

0,2

1,51,0

0,1

1,2

0,5

-1,3

-4,8

0,1

-6

-5

-4

-3

-2

-1

0

1

2

3

00/I III 01/I III 02/I III 03/I III 04/I III 05/I III 06/I III 07/I III 08/I III 09/I III

q-o-

q ch

ange

in %

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M. Singer – Czech Republic: Future challenges and opportunities 4

Cumulative GDP q-o-q growth:Cumulative GDP q-o-q growth: 3Q2008-2Q2009 (not seasonally adjusted) 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

7,4

2,7

1,40,4

-0,9

-2,7 -3,1 -3,6 -3,6 -3,8 -3,9-4,9 -5,2 -5,3 -5,3 -5,4 -5,9 -5,9 -6 -6,1

-7,1 -7,3 -7,5

-8,9 -9

-15,2 -15,7

-18,6-20

-15

-10

-5

0

5

10

R PL BG GR CYP MAL F B SK PT E AT NL CZ L EU-27

H UK S I D DK IRL SLO SF LAT EST LIT

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M. Singer – Czech Republic: Future challenges and opportunities 5

ManufacturingManufacturing

Source: CZSO

The decline in manufacturing output seems to have bottomed out in mid-2009

-30

-20

-10

0

10

20

30I.0

7

II.07

III.0

7

IV.0

7

V.0

7

VI.

07

VII

.07

VII

I.07

IX.0

7

X.0

7

XI.

07

XII

.07

I.08

II.08

III.0

8

IV.0

8

V.0

8

VI.

08

VII

.08

VII

I.08

IX.0

8

X.0

8

XI.

08

XII

.08

I.09

II.09

III.0

9

IV.0

9

V.0

9

VI.

09

VII

.09

VII

I.09

IX.0

9

y-o

-y in

%

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M. Singer – Czech Republic: Future challenges and opportunities 6

Exports, imports and trade balanceExports, 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

-20

-15

-10

-5

0

5

10

15

20

I/06 II III IV I/07 II III IV I/08 II III IV I/09 II

Exports of goods and servicesImports of goods and servicesDifference betw een export grow th and import grow th (in p.p.)

Page 7: M. Singer – Czech Republic: Future challenges and opportunities 1 M. Singer – Present Conditions, Monetary Policy and Outlook in Czech Republic 1 M. Singer.

M. Singer – Czech Republic: Future challenges and opportunities 7

Inflation Inflation (y-o-y in %)(y-o-y in %)

Annual inflation fell towards zero in 2009 Q3

Source: CZSO

-1

0

1

2

3

4

5

6

7

8

1/07 4 7 10 1/08 4 7 10 1/09 4 7

Consumer price inflationMonetary-policy relevant inf lation

Page 8: M. Singer – Czech Republic: Future challenges and opportunities 1 M. Singer – Present Conditions, Monetary Policy and Outlook in Czech Republic 1 M. Singer.

M. Singer – Czech Republic: Future challenges and opportunities 8

CZK/EUR CZK/EUR (1 Jan 2007-17 Nov 2009)(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

22

23

24

25

26

27

28

29

30

2007

m01

d02

2007

m01

d23

2007

m02

d13

2007

m03

d06

2007

m03

d27

2007

m04

d19

2007

m05

d11

2007

m06

d01

2007

m06

d22

2007

m07

d13

2007

m08

d03

2007

m08

d24

2007

m09

d14

2007

m10

d05

2007

m10

d26

2007

m11

d16

2007

m12

d07

2007

m12

d28

2008

m01

d21

2008

m02

d11

2008

m03

d03

2008

m03

d24

2008

m04

d14

2008

m05

d06

2008

m05

d27

2008

m06

d17

2008

m07

d08

2008

m07

d29

2008

m08

d19

2008

m09

d09

2008

m09

d30

2008

m10

d21

2008

m11

d11

2008

m12

d02

2008

m12

d23

2009

m01

d14

2009

m02

d04

2009

m02

d25

2009

m03

d18

2009

m04

d08

2009

m04

d29

2009

m05

d21

2009

m06

d11

2009

m07

d02

2009

m07

d23

2009

m08

d13

2009

m09

d03

2009

m09

d24

2009

m10

d15

2009

m11

d05

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M. Singer – Czech Republic: Future challenges and opportunities 9

CNB’s key ratesCNB’s key rates

Source: CNB

To deal with the strong disinflationary pressures, the CNB has lowered its interest rates to a record low

0

1

2

3

4

5

9/08 10 11 12 1/09 2 3 4 5 6 7 8 9 10

Lombard rate 2W repo rate Discount rate

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M. Singer – Czech Republic: Future challenges and opportunities 10

State budget balanceState 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

-17,0-26,0

1,3

19,7 22,2

36,327,2

12,8

9,7

-28,1

-38,3

-5,7

9,3 5,310,5 10,9

-6,5

-20,0

-55,7

-71,4 -68,3-76,2

-89,6 -87,3

-138,1

-66,4

-160

-140

-120

-100

-80

-60

-40

-20

0

20

40

60

1 2 3 4 5 6 7 8 9 10 11 12

bn C

ZK

2007 2008 2009

Note: GFS 1986

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M. Singer – Czech Republic: Future challenges and opportunities 11

Loans to non-financial corporations Loans to non-financial corporations and households and households (y-o-y change in %)(y-o-y change in %)

Loans to non-financial corporations declined year on year for the first time since 2005

Source: CNB

-10

0

10

20

30

40

1/05 1/06 1/07 1/08 1/09

Loans, total Loans to non-financial corporationsLoans to households

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M. Singer – Czech Republic: Future challenges and opportunities 12

Newly extended loansNewly extended loans (y-o-y change in %)(y-o-y change in %)

Source: CNB

-20

-10

0

10

20

30

40

50

1/05 1/06 1/07 1/08 1/09

Loans, total Loans to non-financial corporationsLoans to households

New loans to non-financial corporations and households decreased

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M. Singer – Czech Republic: Future challenges and opportunities 13

Non-performing loansNon-performing loans (% of total loans in segment)(% of total loans in segment)

Source: CNB

Non-performing loan ratios rose most significantly in non-financial corporations

0

2

4

6

8

10

1/06 1/07 1/08 1/09

Non-financial corporationsLending to individuals for house purchaseConsumer credit to individualsLoans to individualsTotal loans

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M. Singer – Czech Republic: Future challenges and opportunities 14

SummarySummary• 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

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M. Singer – Czech Republic: Future challenges and opportunities 15

CNB ForecastCNB Forecast(November 2009)(November 2009)

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M. Singer – Czech Republic: Future challenges and opportunities 16

GDP growth forecastGDP 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

-8

-6

-4

-2

0

2

4

6

8

IV/07 I/08 II III IV I/09 II III IV I/10 II III IV I/11 II

90% 70% 50% 30% confidence interval

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M. Singer – Czech Republic: Future challenges and opportunities 17

Headline inflation forecastHeadline inflation forecast (annual percentage changes)

Source: CNB

At the monetary policy horizon, the headline inflation forecast is slightly above the inflation target

-2

0

2

4

6

8

IV/07 I/08 II III IV I/09 II III IV I/10 II III IV I/11 II

90% 70% 50% 30% confidence interval

Inf lation target

Monetary policy

horizon

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M. Singer – Czech Republic: Future challenges and opportunities 18

Main uncertainties in short runMain uncertainties in short run

• What will course and intensity of recovery look like internationally and in Czech Republic’s 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

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M. Singer – Czech Republic: Future challenges and opportunities 19

Challenges and possible risksChallenges and possible risks

• Domestic: Fiscal policy • External:

Protracted and painful recovery in Europe Hasty supervision and regulation changes

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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 Long-neglected fisfiscal problemscal problems

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M. Singer – Czech Republic: Future challenges and opportunities 21

Public finance deficitsPublic finance deficits

Source: CNB computation, November 2009 forecast

Public finance deficits will fluctuate between 5% and 6% of GDP over the next few years

-2,9%

-3,6%

-2,6%

-0,7%

-2,0%

-6,0%

-4,9%

-5,6% -5,5%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

2004 2005 2006 2007 2008 2009 2010 2011 2012

As

% o

f G

DP

Note: ESA 95

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M. Singer – Czech Republic: Future challenges and opportunities 22

Public debtPublic debt (as % of GDP)(as % of GDP)

After a period of stability public debt is expected to grow rapidly after 2008

Source: CNB computation, November forecast

24,9

28,229,8 30,1 29,7 29,4 29 30

35,7

39,2

43,2

0

5

10

15

20

25

30

35

40

45

50

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

As

% o

f G

DP

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M. Singer – Czech Republic: Future challenges and opportunities 23

GDP GDP (2000 = 100)(2000 = 100)

The longer term danger for Europe is still its too sluggish growth

Source: Eurostat

95

100

105

110

115

120

125

130

135

140

145

2000

q01

2000

q03

2001

q01

2001

q03

2002

q01

2002

q03

2003

q01

2003

q03

2004

q01

2004

q03

2005

q01

2005

q03

2006

q01

2006

q03

2007

q01

2007

q03

2008

q01

2008

q03

2009

q01

2009

q03

200

0 =

100

CR EU-27 USA

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M. Singer – Czech Republic: Future challenges and opportunities 24

Current problems in financial market Current problems in financial market supervisionsupervision

• 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 EU‘s

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!

Page 25: M. Singer – Czech Republic: Future challenges and opportunities 1 M. Singer – Present Conditions, Monetary Policy and Outlook in Czech Republic 1 M. Singer.

M. Singer – Czech Republic: Future challenges and opportunities 25

Five violated principles – what the Five violated principles – what the current plans neglect/worsencurrent 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)

Page 26: M. Singer – Czech Republic: Future challenges and opportunities 1 M. Singer – Present Conditions, Monetary Policy and Outlook in Czech Republic 1 M. Singer.

M. Singer – Czech Republic: Future challenges and opportunities 26

ConclusionsConclusions• 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)

Page 27: M. Singer – Czech Republic: Future challenges and opportunities 1 M. Singer – Present Conditions, Monetary Policy and Outlook in Czech Republic 1 M. Singer.

M. Singer – Czech Republic: Future challenges and opportunities 27

Thank youThank you

Miroslav [email protected]: +421 224 412 008

Česká národní banka Na příkopě 28 115 03 Praha 1


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