This section is classified as non-objective research

Czech Republic: 0.75% Not Low Enough

Activity: tough times ahead

The Czech economy is becoming a victim of its
low external and public debt, as well as its strong
fiscal and current account performance: while its
safe-haven status in Central Europe is keeping
its risk premium low, it is also leading to currency
strength.
This is bad news for exports, since external
demand is falling sharply, and for overall growth,
as the domestic economy will remain depressed
due to the ongoing sharp fiscal tightening.
We expect GDP growth to slow to around 1.2%
next year, but we are relatively upbeat about the
longer-term prospects for the Czech economy.
Once the fiscal adjustment is complete, around
2013 according to our forecast, tightening
measures will no longer strangle aggregate
demand, and economic growth will accelerate
swiftly.

Inflation: what inflation?

Unsurprisingly, a wide output gap and strong
koruna mean there is no inflation pressure at all.
The planned harmonisation of VAT rates next
year will temporarily boost CPI and core
readings, but inflation will still remain very low.
Although the scope for policy rate cuts is
certainly limited given its current level of a mere
0.75%, we expect the CNB to deliver 25bp of
conventional monetary easing in Q1 2012.
Non-orthodox measures later in 2012 cannot be
ruled out, especially if growth fails to recover
swiftly or the appreciation trend of the koruna
accelerates.

FX and rates: safe-haven play

We expect the koruna to remain supported in the
coming quarter as it is likely to remain a
defensive play for the region. However, we
wouldnt rule out some weakening as rate-cut
expectations begin to intensify in the coming
months.
The front end of the Czech IRS curve should be
further boosted by an expected shift from the
CNB towards a more dovish tone and clearer
indications of future cuts in rates.
Front-end receivers in the Czech Republic
should perform well; we prefer to receive the
spread in 1y1y rates between the Czech
Republic and the eurozone.

Chart 1: Slump in Exports Expected

Source: Reuters EcoWin Pro

Expectations for exports are in free fall as external demand is

dwindling and the koruna remains strong. In light of the domestic
economys weakness, the slowdown in exports will hit GDP growth
severely.

Chart 2: VAT Hike Will Prevent Deflation in 2012

Source: Reuters EcoWin Pro

If it had not been for the VAT harmonisation, which according to the
CNB may add 1pp to inflation, we would be forecasting core deflation
in the Czech Republic next year.

Chart 3: CZK is Regional Out-Performer

(1/6/2011 = 100)
115

EURPLN

113
111
109
107
EURHUF

105
103
101
99

EURCZK

97
95
01/06/11

01/07/11

01/08/11

01/09/11

Source: Reuters EcoWin Pro, BNP Paribas

Michal Dybula, Dina Ahmad

EM Outlook

50

October 2011
www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective research

Czech Republic: Economic & Financial Forecasts

09

Year
(1)
11

10

2010
12

(1)

13

(1)

Q1

Q2

Q3

Q4

Q1

2011
(1)
Q3

Q2

Q4

(1)

Q1

(1)

Q2

2012
(1)
Q3

(1)

Q4

(1)

Components of Growth
GDP (% q/q)

0.8

0.6

0.8

0.5

0.9

0.1

0.1

0.1

0.3

0.5

0.7

GDP

-4.0

2.2

2.0

1.2

3.2

1.2

2.3

2.6

2.7

2.8

2.2

1.8

1.4

0.7

0.8

1.5

1.8

Final Domestic Demand

-1.8

-0.8

0.6

0.5

2.7

-1.6

-1.1

-0.2

-0.3

0.5

0.3

0.7

0.9

0.3

0.5

0.6

0.6

Private Consumption

-0.1

0.1

-0.3

-0.3

2.6

-0.1

-0.1

-0.1

0.6

-0.3

-0.6

-0.2

-0.1

-0.7

-0.3

-0.2

-0.2

Public Consumption

2.6

-0.1

-0.6

0.3

0.8

2.4

0.8

-0.8

-2.6

-1.1

-1.4

0.0

0.2

0.3

0.5

0.3

0.1

Fixed Investment

-7.9

-3.1

3.2

2.1

4.1

-7.7

-4.5

0.0

-0.1

3.4

3.6

2.9

3.0

2.0

1.6

2.3

2.6

Stocks (Cont. to Growth, y/y)

Exports

0.8

-2.5

2.1

0.2

-0.1

0.4

0.0

1.9

4.2

2.5

0.1

0.5

0.1

-0.1

-0.3

-0.2

0.0

0.2

-10.9

17.9

10.8

7.9

10.0

18.6

19.5

16.5

16.8

15.1

9.7

10.6

7.8

6.7

5.7

9.1

10.3

Imports

-10.3

17.6

8.9

6.4

9.6

15.4

18.5

19.2

17.4

12.6

7.8

8.7

6.5

5.1

4.5

7.4

8.5

Industrial Production

-13.2

10.2

7.8

3.5

5.1

6.7

11.7

10.7

11.9

12.5

9.1

5.7

4.0

2.6

2.4

3.8

5.3

09

10

Year
(1)
11

2010
12

(1)

13

(1)

Q1

Q2

Q3

Q4

Q1

Q2

2011
(1)
Q3

Q4

(1)

Q1

(1)

Q2

2012
(1)
Q3

(1)

Q4

(1)

Inflation & Labour

CPI

1.1

1.5

1.7

2.0

1.4

0.7

1.2

2.0

2.3

1.7

1.8

1.7

1.6

2.5

2.2

1.8

1.5

Core CPI

-0.6

-0.4

0.7

1.0

0.3

-1.0

-0.8

0.1

0.3

0.6

0.9

0.7

0.5

1.3

1.0

0.8

0.7

Employment

-5.5

-1.6

0.1

-1.0

-0.1

-4.1

-1.6

-0.3

-0.5

0.1

0.0

0.0

0.1

-0.6

-1.1

-1.5

-1.0

3.3

1.9

3.1

4.3

4.6

2.6

2.7

1.9

0.6

2.1

2.5

4.0

3.9

4.0

4.0

4.7

4.5

ULC

-0.5

-0.8

0.7

0.4

0.1

-0.9

-0.7

-0.2

-1.5

0.4

0.6

0.7

1.2

0.6

0.3

0.3

0.3

Unemployment Rate (%)

8.1

9.0

8.7

8.8

8.7

9.8

8.8

8.6

8.9

9.5

8.3

8.4

8.7

9.4

8.4

8.6

9.0

Wages

09

10

Year
(1)
11

2010
12

(1)

13

(1)

Q1

Q2

Q3

Q4

Q1

2011
(1)
Q3

Q2

Q4

(1)

Q1

(1)

Q2

2012
(1)
Q3

(1)

Q4

(1)

External Trade
Trade Balance (EUR bn)

3.34

2.11

2.57

3.76

4.39

1.22

0.89

-0.18

0.18

1.39

1.02

-0.23

0.38

1.30

1.30

0.23

0.93

Current Account (EUR bn)

-3.49

-4.69

-5.48

-3.71

-3.25

0.55

-1.07

-3.54

-0.63

0.87

-2.05

-3.51

-0.79

1.08

-1.17

-3.23

-0.38

-2.5

-3.2

-3.6

-2.3

-1.9

1.6

-3.1

-9.7

-1.7

2.3

-5.7

-8.9

-2.0

2.7

-3.1

-8.0

-0.9

Current Account (% of GDP)

09

Year
(1)
11

10

2010
12

(1)

13

(1)

Q1

Q2

2011
Q3

Q4

Q1

Q2

2012
Q3

Q4

Q1

Q2

Q3

Q4

Financial Variables
Gen. Gov. Budget (CZK bn)

-212

-171

-159

-138

-118

Gen. Gov. Budget (% GDP)

-5.8

-4.7

-4.2

-3.6

-2.9

Primary Budget (% GDP)

-4.5

-3.3

-2.8

-2.2

-1.5

Gen. Gov. Debt (% GDP)

35.3

38.5

41.7

44.1

45.3

09
Interest Rates & Bonds

10

Year
(1)
11

2010
12

(1)

13

(1)

Q1

Q2

2011
Q3

Q4

Q1

Q3

Q2

Q4

(1)

Q1

(1)

Q2

2012
(1)
Q3

(1)

Q4

(1)

(2)

Policy Rate (%)

1.00

0.75

0.75

0.50

0.50

1.00

0.75

0.75

0.75

0.75

0.75

0.75

0.75

0.50

0.50

0.50

0.50

3-Month Rate (%)

1.54

1.22

1.15

0.90

0.90

1.44

1.23

1.21

1.22

1.23

1.18

1.15

1.15

0.90

0.90

0.90

0.90

2-Year Bond (%)

1.88

1.82

1.20

1.15

1.45

1.30

1.88

1.74

1.82

1.76

1.48

1.40

1.20

1.05

1.00

1.10

1.15

5-Year Bond (%)

3.31

3.18

1.85

2.10

2.15

3.01

2.85

2.62

3.18

3.15

2.74

2.01

1.85

1.75

1.70

1.90

2.10

10-Year Bond (%)

4.04

3.95

3.12

3.20

3.25

4.02

4.17

3.42

3.95

4.06

3.84

3.22

3.12

3.01

2.95

3.10

3.20

66

99

112

20

92

159

116

99

71

83

155

112

76

45

35

20

2-Year Swap (%)

2.39

1.95

1.20

1.15

1.45

2.30

1.76

1.70

1.95

2.24

2.10

1.40

1.20

1.05

1.00

1.10

1.15

5-Year Swap (%)

3.15

2.43

1.55

1.80

1.85

3.06

2.42

2.18

2.43

2.87

2.68

1.72

1.55

1.45

1.40

1.60

1.80

10-Year Swap (%)

FX Rates (2)

3.60

2.90

2.10

2.30

2.45

3.57

3.03

2.68

2.90

3.32

3.17

2.20

2.10

2.01

2.00

2.15

2.30

Spread over Bund (bp)

Interest Rate Swaps (2)

EURCZK

26.32

25.00

25.00

23.50

23.30

25.37

25.68

24.58

25.00

24.52

24.28

24.40

25.00

24.30

24.10

23.80

23.50

USDCZK

18.38

18.67

17.24

15.88

16.64

18.80

20.99

17.95

18.67

17.31

16.75

17.68

17.24

16.42

16.07

15.87

15.88

Footnotes: (1) Forecast (2) End period

Figures are year-on-year percentage changes unless otherwise indicated
Source: BNP Paribas

Michal Dybula, Dina Ahmad

EM Outlook

51

October 2011
www.GlobalMarkets.bnpparibas.com