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Czech Republic Country Risk Report Q2 2016

  • March 2016
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views Economic growth in the Czech Republic will stay strong in the coming years and amount to 2.6% in 2016 and 2.4% 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 2.0% of GDP in 2016 and 2017 and overall government debt will fall below 45.0% of GDP in the coming years.

The Czech Republic’s trade surplus will swell to 8.0% 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 2016, 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 in place in 2016 and 2017. Changes To Forecasts We adjusted our GDP growth forecasts for the Czech Republic slightly downwards for 2016 and 2017, due to rising import receipts, as households are increasingly demanding higher value goods from abroad. We expect the economy to expand by 2.6% in 2016 (instead of 3.4%) and by 2.4% in 2017 (instead of 3.2%).

Table Of Contents

Czech Republic Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Changes To Forecasts5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Household Spending To Drive Growth8
Due to a shortfall in public investment and uptake of EU structural funds, Czech GDP growth will slow in 2016 and 2017 However,
with the labour market tightening and wages set to surge, we see household consumption increasingly driving growth in the years
ahead
GDP By Expenditure Outlook 9
TABLE: 10-YEAR GDP FORECAST10
TABLE: PRIVATE CONSUMPTION FORECASTS10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS10
Fiscal Policy And Public Debt Outlook 11
Public Finances To Stay Healthy11
Due partially to solid economic and employment growth rates, the Czech Republic's public finances will stay healthy in 2016 and 2017
Tax revenues will benefit from strong retail sales, while government borrowing costs will stay low amid record-low interest rates and the
country's safe haven status
Structural Fiscal Position 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES12
TABLE: FISCAL POLICY13
External Trade And Investment Outlook 14
External Trade To Flourish14
The Czech export machine will continue to benefit from low oil prices and an artificially cheap currency until 2017 With wages
increasingly catching up to western European levels, we expect import growth to be strong, keeping the Czech current account relatively
balanced in the years ahead
Outlook On External Position 16
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE16
TABLE: TOP 5 IMPORTS IN 201416
TABLE: TOP 5 EXPORTS IN 201417
Monetary Policy 18
Negative Interest Rates Unlikely18
The Czech National Bank will not follow its European peers in lowering interest rates into negative territory However, the koruna will
continue to be capped to the euro at CZK2700/EUR until end-2017 to support the export sector, employment growth rates and inflation
outlook
Monetary Policy Framework 19
Currency Forecast 21
CZK Cap To Stay, For Now21
The Czech National Bank will keep its currency cap of CZK2700/EUR and leave its policy rate at 005% in 2016 However,
with the CNB's inflation target in sight by end-2017, the koruna will return to a free-floating mechanism, leading to broad based
appreciation
TABLE: BMI CURRENCY FORECAST21
Chapter 2: 10-Year Forecast 23
The Czech Economy To 2025 23
To Catch Up With Western Peers23
We forecast the Czech Republic to remain a positive convergence story through t he 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 FORECASTS23
Chapter 3: Political Outlook 25
SWOT Analysis 25
BMI Political Risk Index 25
Domestic Politics 26
Relations With the EU To Get Colder26
Relations between the Czech Republic and the EU will worsen over the coming quarters We expect the Czech government to continue
to oppose the EU's migrant reallocation system and re-introduce border controls in line with the other CE states
TABLE: POLITICAL OVERVIEW26
Long-Term Political Outlook 28
Further Western Integration Ahead28
The Czech Republic will remain the most developed CEE state over the next ten 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 33
SWOT Analysis 33
Operational Risk Index 33
TABLE: OPERATIONAL RISK34
Trade Procedures And Governance 35
TABLE: IMPORT AND EXPORT DOCUMENTS35
TABLE: TRADE PROCEDURES BREAKDOWN35
TABLE: EMERGING EUROPE - TRADE PROCEDURES AND GOVERNANCE RISKS 36
Vulnerability To Crime 37
Chapter 5: BMI Global Macro Outlook 41
Global Macro Outlook 41
Tail Risks Mounting Amid Sub-Par Growth41
TABLE: GLOBAL ASSUMPTIONS41
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %42
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%) 42
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %43
TABLE: MACROECONOMIC DATA and FORECASTS45

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