Czech Republic Business Forecast Report Q3 2009

Publication Date	June 2009
Publisher	Business Monitor
Product Type	Report
Pages	65
ISBN Number	1745-0535
Product Code	BMI03944

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Summary

The Czech economy will undergo a painful recession in 2009, as export demand and foreign capital inflows from the eurozone dry up. Indeed, taking account of both the Q109 Czech GDP growth figure (-3.4% y-o-y), an array of leading indicator data, and a recent downgrade to our fullyear German real GDP growth forecast to -5.8%, we have cut our 2009 Czech growth forecast to -3.1% from -2.1%. That said, we maintain our core view that the Czech economy is relatively well-placed to weather the global economic downturn, as a result of its stable banking system, FDI-heavy financial account, and low national debt. As such, we believe that the country is at little risk of a systemic economic crisis, and expect the Czech Republic to benefit fully from the global economic recovery, with positive growth of 1.1% and 3.2% forecast for 2010 and 2011 respectively.

That said, we caution that the key risks remain in the political sphere. The collapse of the minority Civic Democrat-led coalition in March and its subsequent replacement by an interim technocratic administration does not bode well for long-term structural-economic reform, although the new cabinet will at least provide a reasonable level of policymaking continuity.

Prime Minister Jan Fischer's non-partisan cabinet, which officially took office on May 8, combines a number of policymaking strengths, particularly budgetary and European affairs expertise (which bode well for fiscal consolidation and salvaging the remainder of Prague's H109 EU Presidency, respectively). Nevertheless, Fischer's government's fundamental problem is that it lacks an independent political mandate, and is dependent on the support of both the Civic Democrats (ODS) and Social Democrats (CSSD), which are staunch political opponents. The cabinet is likely to come under considerable political pressure through to elections in October. Furthermore, a CSSD victory - which polls suggest is likely - could well see the pace of economic reform and fiscal consolidation slow, given the Social Democrats' more sceptical attitude towards market liberalisation.

The recession that will run throughout 2009 and into 2010 in the Czech Republic will put severe strain on all aspects of the economy. We forecast the fiscal deficit to soar to 5.3% of GDP in 2009 and 5.6% in 2010 from 0.9% in 2008, as tax revenues collapse and social spending demands rise. The balance of payments will come under similar strain, as FDI inflows from the recessionhit eurozone fall, and this reduction of the financial account surplus will force a correction in the current account, lowering the deficit to 1.1% of GDP in 2009 from 3.0% in 2008. We also expect fundamental pressures on the Czech koruna to remain weighted to the downside, and forecast renewed depreciation towards CZK30.00/EUR by end-2009.

The Czech business environment is one of the best in emerging Europe, thanks to comparatively low corruption, a friendly tax regime, effective judicial process, and full integration with both EU markets and regulatory standards. Moreover, the country benefits from a high skill base, particularly in advanced manufacturing sectors, coupled to wages that are below the EU average. That said, we caution that a key drag on business in 2009 and into 2010 will be the global contraction of credit, and the subsequent difficulty that firms will face in accessing credit to pursue investment projects and meet cyclical costs.

Content

Executive Summary
- A Sharp Contraction But Safe From Crisis
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- New Government To Lack Reform Mandate
- The appointment of a new Czech government bodes well for political stability in the short term, and should allow both economic and foreign policy to move forward
- Foreign Policy
- Lisbon To Be Ratified, But With Delays
- Senate approval removes a major hurdle to overall Czech ratification of the EU's Lisbon Treaty, and we now expect
- Prague to move towards fully accepting the accord by end-2009
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Leading Indicators Confirm Recession
- Recent leading indicator data and the Q109 preliminary GDP growth figure confirm that the Czech economy will suffer recession in 2009
- Exchange Rate Policy
- Koruna Weakness To Resume By End-Year
- The Czech koruna has appreciated since late February, and the unit has potential to make further short-term gains as long as the present global improvement in market sentiment remains in play
- Monetary Policy
- More Rate Cuts Likely In 2009
- We believe that there is significant scope for the Czech National Bank to cut its key two-week repo rate by a further
- 50bps this year, which would bring the end-2009 policy rate to 1.00%, equal to that of the European Central Bank
- Fiscal Policy
- Budget Deficit To Remain Manageable
- The Czech Republic's budget deficit is set to soar to 5.3% of GDP in 2009, as tax revenues collapse and social security claims rise amid a significant economic recession
- Balance Of Payments
- Income Account To Remain Principal Burden
- We believe that the Czech current account deficit is set to compress to 1.1% of GDP in 2009 from 3.0% in 2008
Chapter 3: 10-Year Forecast
- The Czech Economy To 2018
- Effective Convergence By 2018
- We forecast the Czech Republic to have effectively converged in both economic and political terms with the eurozone by the end of our 10-year forecast period in 2018, despite the negative impact of recession in 2009
Chapter 4: Special Report
- The Outlook For Global Banking
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
Chapter 6: Key Sectors
- Freight Transport
- Executive Summary
- The Czech Republic's membership of the EU requires the Czech transport industry to harmonise with European transport in terms of infrastructure, speed and tariffs
- Petrochemicals
- Executive Summary
- The Czech Statistical Office has announced that exports for chemicals and related products increased marginally for 2008, while imports fell
Chapter 7: BMI Global Assumptions
- Global Assumptions
List of Tables
- Table: KEY FIGURES IN NEW CZECH GOVERNMENT, FROM MAY 2009
- Table: Czech Political Overview
- Table: ECONOMIC ACTIVITY
- Table: EXCHANGE RATE POLICY
- Table: MONETARY POLICY
- Table: FISCAL POLICY
- Table: BALANCE OF PAYMENTS (Euro)
- Table: CZECH REPUBLIC Long -Term Macroeconomic Forecasts
- Table: LOAN-TO-DEPOSIT RATIOS, Selected States
- Table: LOAN GROWTH, Selected States
- Table: COMMERCI AL BANKING BUSINESS ENVIRONMENT RATINGS, SELECTED STATES
- Table: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Table: BMI LEGAL FRAMEWORK RATINGS
- Table: LABOUR FORCE QUALITY
- Table: Europe, FDI Annual Inflows
- Table: BMI TRADE RATINGS
- Table: CZECH TOP EXPORT DESTINATIONS
- Table: Czech Republic - Transport And Communicat ions Sector Indicato rs, 2006-2013
- Table: Czech Republic Petrochemical Indust ry, 2005-2012
- Table: GLOBAL ASSUMPTIONS
- Table: GLOBAL & REGIONAL REAL GDP GROWTH
- Table: EMERGING MARKETS
- Table: COMMODITIES