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Czech Republic Country Risk Report Q4 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views

Economic growth in the Czech Republic will stay strong in the coming years and amount to 2.6% in 2016 and 2.5% in 2017. The largest contributor to GDP growth will continue be private consumption (1.4 percentage points in 2016). Strong wage growth will continue to underpin private consumption's share of the economy. We are forecasting the budget deficit will stay under 1.5% of GDP in 2016 and 2017 and overall government debt will fall below 40.0% of GDP in the coming years. The Czech Republic's trade surplus will stabilise at over 6.0% of GDP in 2016 and the country's current account will stay relatively balanced in the years ahead. Stronger inflation will return to the Czech Republic in 2017, for when we forecast price growth to accelerate to the central bank's target of 2.0%. We expect the Czech National Bank to keep interest rates at 0.05% and leave the koruna cap of CZK27.00/EUR until mid-2017.

Table Of Contents

Czech Republic Country Risk Report Q4 2016
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Brexit Accelerating Transition Towards Consumption-Based Economy..................................................................................8
Owing to the Czech Republic's sizeable trade exposure and reliance on fixed investment inflows, the export-oriented industrial sector
will be hit by slower economic growth across the eurozone and the UK over the coming quarters. However, household consumption will
remain a bright spot and grow robustly on the back of a tightening labour market and surging wages.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: 10-YEAR GDP FORECAST..........................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS....................................................................................................................................................9
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................10
Fiscal Policy And Public Debt Outlook.................................................................................................................. 10
Expenditure Will Rise But Debt Will Decline...............................................................................................................................10
Czech Republic's government will continue to take advantage of near zero and negative interest rates to expand spending in the
quarters ahead. As a result the budget deficit will widen, but the public debt ratio will narrow.
Structural Fiscal Position........................................................................................................................................ 11
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.............................................................................................................................12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................12
External Trade And Investment Outlook................................................................................................................ 13
Domestic Economic Strength Tipping C/A Into Deficit..............................................................................................................13
The Czech Republic's export sector will continue to benefit from an artificially cheap currency and robust eurozone demand in the
months ahead. However, the country's transition towards more domestic consumption via currency strength in 2017 and strong wage
growth will narrow its current account surplus in the years ahead.
Outlook On External Position.................................................................................................................................. 14
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE....................................................................................................................................14
TABLE: TOP 5 IMPORTS IN 2015...........................................................................................................................................................................14
TABLE: TOP 5 EXPORTS IN 2015.......................................................................................................................................................................... 15
TABLE: CURRENT ACCOUNT BALANCE FORECASTS....................................................................................................................................... 15
Monetary Policy
Supply And Demand Factors Pointing Towards Stronger Inflation.........................................................................................16
Inflation will approach the Czech National Bank's (CNB) target of 2.0% in the quarters ahead, on the back of a tightening labour market
and increasing commodity prices. However, the CNB will not hike rates, but rather abandon its currency cap in mid-2017 to counter
stronger inflationary pressures.
Monetary Policy Framework.................................................................................................................................... 17
TABLE: MONETARY POLICY FORECASTS.......................................................................................................................................................... 17
Currency Forecast.................................................................................................................................................... 18
CZK: Removal Of Currency Cap By H217...................................................................................................................................18
As inflationary pressures rise, t he Czech National Bank will remove the currency cap of CZK27.00/EUR by H217, resulting in the
appreciation of the Czech koruna. The real GDP growth differential between the Czech Republic and the eurozone will remain elevated
in the quarters ahead, leading to long-term CZK appreciation.
TABLE: CURRENCY FORECAST...........................................................................................................................................................................18
Chapter 2: 10-Year Forecast................................................................................................................... 21
The Czech Economy To 2025.................................................................................................................................. 21
To Catch Up With Western Peers.................................................................................................................................................21
We forecast the Czech Republic to remain a positive convergence story through the coming 10 years, despite a slow economy recovery
between 2012-2014, with the eurozone accession policy anchor contributing to steady progress in a long-term government reform
agenda, despite a target for accession yet to be decided.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................21
Chapter 3: Political Outlook.................................................................................................................. 23
SWOT Analysis......................................................................................................................................................... 23
BMI Political Risk Index........................................................................................................................................... 23
Domestic Politics..................................................................................................................................................... 24
Regional Elections: First Test For Ruling Social Democrats....................................................................................................24
Although the Czech Republic remains a relative bright spot for the European Union in Central Europe, anti-establishment parties will
continue to gain traction. The upcoming regional elections in October will be a key testing ground for the ruling Social Democrats,
prompting them to increasingly adopting eurosceptic and populist policies.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................24
Long-Term Political Outlook................................................................................................................................... 25
To Stay Regional Anchor Of Stability..........................................................................................................................................25
The Czech Republic will remain the most developed CEE state over the next 10 years, with per capita income set to catch up with
some EU-15 member states by the early 2020s. The country will face some key challenges, namely fiscal pressures from an ageing
population, relations between Czechs and immigrant minority groups, and potential ructions with Brussels. Nevertheless, the Czech
Republic will remain among the most politically, socially and economically stable countries in Europe through the next decade.
Chapter 4: Operational Risk................................................................................................................... 29
SWOT Analysis......................................................................................................................................................... 29
Operational Risk Index............................................................................................................................................ 29
Operational Risk....................................................................................................................................................... 30
TABLE: OPERATIONAL RISK.................................................................................................................................................................................30
Market Size And Utilities ......................................................................................................................................... 31
TABLE: EMERGING EUROPE-MARKET SIZE AND UTILITIES RISK..................................................................................................................31
Labour Costs............................................................................................................................................................ 35
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE............................................................................................... 35
Chapter 5: BMI Global Macro Outlook................................................................................................... 39
Global Macro Outlook.............................................................................................................................................. 39
EMs Past The Worst, But Structural Problems Persist.............................................................................................................39
TABLE: GLOBAL ASSUMPTIONS..........................................................................................................................................................................39
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %..................................................................................................................................40
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %.................................................................................................................................41
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................43

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