Download 3. External and Internal Balance

3.
External and Internal Balance
3.1.
Foreign trade
In 2005 the value of exported goods for the first time exceeded the value of imported goods and the
foreign trade achieved its best result in the Czech economic history. The trade was positively influenced by
the growth phase of business cycle, functioning of the country within the single European market, confirmed
by the recovery in the states of key business partners9, probably also by the improved health of the corporate
sector, and last but not least, by the continuing effect of the changed economic structure, particularly due to
effects of the long-term inflow of direct foreign investment to the Czech Republic.
The trade balance result is also exceptional with respect to the fact that almost during the entire year
2005 the Czech foreign trade operated in terms of deteriorating exchange relations. Another adverse factor
disadvantaging Czech exports and simultaneously deteriorating the balance of payments was the continued
appreciation of the CZK/EUR exchange rate. One the other hand, the CZK/USD appreciation mitigated the
negative impact of very high prices for imported oil.
• Factor analysis
shows a gradual
decrease of
negative effects of
foreign trade on
external imbalance
of the Czech
economy
In most of the period 1993-2003 the deteriorating deficit of the balance of payments
current account of the Czech Republic was related to the foreign trade deficit – until
2000 the trade balance was the decisive element in external imbalance measured by
the current account balance (Graph 3.1.1). However, in 2001 the value differences
between imports and exports started to decrease and in 2005 the value of goods
exports exceeded imports, i.e. the development resulted in a positive balance of trade
amounting to CZK 39.5 billion.
• Improvement of
the trade balance
observed since
2001 peaked in 2005
by surplus of CZK
39.5 billion
Roots and consequences of the two strong imbalance waves observed in relation to
Czech foreign trade in the periods 1996-1997 and 2000-2001 were not identical. In
the first case the deeply deficit trade balance amounting to CZK -154.9 billion or CZK
-155.2 billion (invoked by mostly consumer import expansion) became one of the
reasons of the currency crisis and the subsequent economic policy correction
resulted in an economic decline. On the other hand in the second case the again
relatively deep trade imbalance (CZK -120.8 billion in 2002) derived particularly from
the strong inflow of direct investment related to investment imports, by which foreign
companies equipped their new or existing facilities in their local acquisitions. This
situation therefore was not an echo of the years 1996-1997 but a preparatory phase
of strong multiplication effects brought by direct foreign investments and transformed
into export-oriented activities.
Although the deficit current account as a common measure of external imbalance of
the economy survives, it does not result from the foreign trade deficit anymore (Table
3.1.1) but from the negative results of revenues recorded by the balance of payments
current account. The reason derives from the opening scissors of the wage volumes
of residents abroad and non-residents in the Czech Republic, but particularly from
payments of foreign investors’ dividends to their parent countries on account of
reinvested profits. When the contribution of the income balance to the current account
imbalance in 1995-2005 increased 28 times (from +8 % to +223 %), the high negative
contribution of the trade balance (+270 % in 1995) finally improved the stated deficit
in 2005 (-62 %).
9
According to average quarter-on-quarter GDP growth values at constant prices adjusted for seasonal effects and
working days.
37
Graph 3.1.1
Current account of balance of
payments and balance of trade of
the Czech Republic (CZK bn.)
Graph 3.1.2
45
Balance of trade, imports and
exports (CZK bn.)
2 000
Balance of trade
0
1993
1 600
1995
1997
1999
2001
2003
Exports
Imports
2005
1 200
-45
800
-90
400
-135
0
-180
Balance of trade
Table 3.1.1
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-400
1993
Current account of trade balance
1995
1997
1999
2001
2003
2005
Analysis of contributions of individual components of the balance of payments
current account of the Czech Republic to its deficit/surplus in the period 1993-2004
Current account
(balance)
+/- (CZK bn.)
+13.287
-22.643
-36.331
-111.869
-113.037
-40.492
-50.596
-104.877
-124.478
-136.378
-160.615
-173.510
-63.746
Balance of
Balance of
Current transfers
services
incomes
(%)
(%)
(%)
-115
+222
-26
+19
+176
-62
+3
-16
+269
-135
+8
-42
+138
-44
+18
-9
+137
-49
+22
-10
+207
-153
+87
-41
+130
-82
+92
-40
+115
-52
+51
-14
+94
-47
+67
-14
+52
-16
+85
-21
+43
-8
+75
-10
+15
-6
+91
-2
-62
-29
+223
-33
Source: own calculations according to data provided by CNB and CZSO
Balance of trade
(%)
N.B.:
Mark “+“ for percentage contributions means that the component in the given year adds to the current account deficit, i.e.
increases the deficit, mark “-“ means that the component in the given year deducts from the deficit (reduces the deficit);
in case of current account surplus the meaning shall be reverse. For 2004 and 2005 the data include the foreign trade
revision performed by CZSO.
• Extremely
strong GDP
dependence on
exports in Czech
economy
A typical feature of the Czech economy growth consists in the very strong link
between the export performance development and nominal GDP – in 1999-2005 the
correlation coefficient (calculated according to quarterly nominal values of export and
GDP at current prices) amounted to 0.95. Also the mutual relation of the imports
development and GDP development is very intense, in this case the dependent
variable is hard to determine, because the impact of imports value on GDP is more
complex due to intermediate consumption. The strong import intensiveness of the
Czech economy may also explain also the third relation, the very convincing mutual
correlation of imports and exports (coeff. 0.98 according to quarterly foreign trade
nominal values).
However, the very tight dependence of the developments of export, import and GDP
in nominal terms cannot be confirmed by the same relations regarding the dynamics
of these phenomena in y-o-y comparison, because the growth rates of imports and
exports are in a longer term influenced by the preceding year’s base and foreign
exchange and price effects. Previous analyses have already proven that the Czech
38
foreign trade is substantially less influenced by variations in prices of oil as a strategic
import raw material, compared to impacts of exchange rate impacts.
Graph 3.1.3
Cumulative foreign trade balance of the Czech Republic
(EUR million, data before revision)
2 000
1 000
0
-1 000
-2 000
1999
2001
2003
2005
-3 000
2000
2002
2004
-4 000
1
2
• Impact of CZK
exchange rate
development on
foreign trade in CR
peaked in 2002
3
4
5
6
7
8
9
10
11
12
The decrease of foreign trade dynamics in 2002 (y-o-y imports in CZK dropped by
4.3 %, exports by 1.0 %) derived particularly from the strong appreciation of CZK
against EUR, evident from autumn 2001 until July 2002, which reflected negatively
mainly in the value of exported goods. But in fact this was the only period in the
analysed time series, when the impact of exchange rate on foreign trade
performance could be assessed as provable – 2002 was the peak year of the huge
inflow of direct foreign investments, the Czech currency appreciated also to
purchases in anticipation of further privatization of strategic government shares.
The trend in 1999-2005 was a continuous appreciation of CZK/EUR (Graphs 3.1.6
and 3.1.8 ) – in spring 1999 the koruna attacked the level of 38.0 CZK/EUR (average
monthly exchange rate in April was 37.997) and closed under the psychological limit
of 29.0 CZK/EUR in the end of 2005 (December average 28.975). Moreover, since
early 2006 we can observe further strong appreciation, the exchange rate in February
2006 achieved the average of 28.409 CZK/EUR.
The exchange rate impact in 2002 was so strong that it played also a decisive role in
the year-on-year decrease of exports value expressed in CZK, although exports
expressed in EUR recorded growth by 9.5 % (Graph 3.1.7). The moderate
depreciation of CZK from August 2003 to December 2004 did not have any
proportionate impact on higher export values, exports in 2003 increased from the low
comparison base of the preceding year by 9.2 %. We may derive that in comparison
to three Central European countries the Czech economy according to the CZK
exchange rate development converges with a highest rate in real terms – since
January 1999 until December 2005 CZK appreciated against EUR by 16.8 %, SKK
by 11.3 %, PLN by 4.2 % and HUF depreciated by 1.2 % (weekly average
calculations).
• Trade balance
improved in 19992005 even upon
continuous trend of
CZK/EUR
appreciation
disadvantaging
Czech exports
The relation of the two phenomena, the exchange rate and the trade balance, is in
general bidirectional, because the exchange rate movements may activate foreign
trade data (positively and negatively) and trade balance results affect the exchange
market. In the 90’s the Czech currency was mostly indifferent to foreign trade results.
Even in periods of deep falls of the trade balance the koruna did not record any
shock depreciations, because at that time the demand for Czech currency was
influenced by the high interest rate potential. But even the exchange rate
development in 1999-2005, at the time of strengthening of the market nature of the
economy which brought more maturity to the financial market, shows that classic
relations between the currency and foreign trade developments have not been
unambiguously valid for the Czech economy in the entire period. On the contrary
Graph 3.1.6 evidently illustrates that improvements in trade balance were – except
for the period from mid-2002 until the end of 2003 – accompanied with a trend
39
appreciation of the Czech currency, disadvantageous for exports. The share of
exports in the dynamics of the total foreign trade turnover in 2005 amounted almost
to two thirds.
Although the koruna in 2005 continued to appreciate, the cumulative trade balance
was positive during all months (Graph 3.1.3), which was a historic record again.
Graph 3.1.4
Import, export and GDP at c.p.
(CZK bn., yearly data)
3 500
Graph 3.1.5
30
900
Exports (CZK bn.)
GDP (CZK bn.)
Imports (CZK bn.)
3 000
y = 3,1225x - 3220
R2 = 0,9281
800
700
2 500
2 000
20
10
600
0
500
-10
400
-20
-30
300
1 500
200
y = 0,0135x - 32,879x + 19985
R2 = 0,5084
0
III.99
500
2000
Graph 3.1.6
2001
2002
2003
2004
Trade balance of CR and CZK/EUR
exchange rate (monthly development)
15 000
40
10 000
35
5 000
30
0
25
-5 000
20
-10 000
15
-15 000
10
-20 000
5
Graph 3.1.7
I.01
I.02
I.03
I.04
I.05
III.03
III.04
III.05
Export dynamics in EUR and CZK
(y-o-y, %)
2004
Export dynamics, CZK (year-onyear, %)
2003
Export dynamics, EUR (year-onyear, %)
2002
2001
I.06
Trade balance (CZK million) - LH asix
Average monthly exchange rate CZK/EUR
Polynomický (Trade balance (CZK million) - LH asix)
• Comparison of
Czech foreign trade
to new EU Member
States in Central
Europe after 2004 is
very positive for CR
III.02
2005
0
I.00
III.01
GDP at current prices (CZK bn.)
Trade balance (CZK million) - RH axis
Lineární (GDP at current prices (CZK bn.))
Polynomický (Trade balance (CZK million) - RH axis)
2005
-25 000
-50
-60
III.00
0
1999
-40
2
100
1 000
I.99
Trade balance and GDP at c.p.
(by quarters)
2000
-5%
0%
5%
10%
15%
20%
25%
30%
Openness of the Czech economy remains high and is indicated also by international
comparisons. For example, according to Eurostat annual values of total exports in
CR expressed in EUR in 1999-2004 were roughly the same as in Poland, however,
Polish economy is substantially bigger by its GDP. In 2005 Polish exports amounted
to EUR 71.9 billion, Czech exports to EUR 63.0 billion. For imports this value
difference is even higher (EUR 81.2 billion and EUR 61.6 billion, respectively) and
means that Polish trade balance is much worse compared to the CR (EUR -11.5
billion and EUR -0.67 billion, respectively) and notwithstanding gradual reductions
since 2000 the share of Polish deficit in 2004 in the total EU-25 deficit amounted
almost to one sixth.
CR, as well as Slovakia, succeeded to gain maximum from its membership in the
single European market. Accession to the EU confirmed and supported the strong
focus of their foreign trade in the Union states. In comparison to Hungary and Poland
their trade link to the EU is stronger, because in 2004 Czech imports from EU took
40
79.7 % of the total imports to the CR, Slovak imports achieved 79 %. The share of
the single European market in exports from both countries was even more significant
– the EU countries in 2004 constituted an export territory for 85.9 % of Czech exports
and 84.1 % of Slovak exports (in Hungary relevant shares in the given year
amounted to 67 % for imports and 79.2 % for exports, in Poland 74.4 % and 78.5 %,
respectively).
But only the Czech Republic succeeded to increase further the share of its EU
exports in total exports volume in comparison to 2000 (+5.9 pp). This fact is even
more important with regard to the fact that all the countries enjoy the comparative
advantage of the near market with an immense purchasing power and absorption
import capacity.
• Favourable
proportion of
import and export
rates improved the
balance of trade …
The trade balance result in 2005 was positively influenced by the highest growth rate
of exports compared to imports – the imports value increased by 4.6 %(y-o-y),
exports value increased by 8.9 %. The mutual proportion of growth rates was better
than in the EU-25 countries, where imports in comparison to 2004 increased by 7.2
% and exports by 8.3 %, as well as in comparison to the old Member States (in the
EU-15 imports grew by 6.4 % and exports by 6.7% in y-o-y values). The foreign trade
turnover dynamics of the Czech Republic retains the approximately two-thirds share
of exports in terms of value.
... but imports and
exports were below
the 2000 - 2005
average influenced
by extreme
increments in 2004
While GDP at current prices accelerated its growth in 2005 to the level above the
2000-2005 average (7.1 % compared to 6.2 %), the growth rates of imports and
exports in 2005 were lower than the average annual dynamics of the mentioned
period.
Graph 3.1.8
Bigger difference from the average rate was recorded rather by imports (4.9 %
against 10.0 %) than exports (8.9 % against 11.3 %) and this fact improved the trade
balance, which in cumulative form showed surpluses during the entire year 2005
(Graph 3.1.3). The main cause was the favourable development of industrial
production, continuous influx of pro-export direct foreign investments with
multiplication effects on domestic production and certain saturation of imports of
technologies for foreign companies in the Czech Republic, resulting in a generally
lower increment of imports of machinery and equipment compared to the period 2000
- 2001. These influences finally overcame the disadvantaging impacts of deteriorated
exchange relations and appreciating rate of CZK against key currencies.
Development of exchange rates on Graph 3.1.9
in Central Europe compared to CZK
(01/99=100)
125
120
Trade gains/losses of Czech
economy from changed in trade
relations (CZK bn.)
80
7
60
6
115
5
40
110
4
105
20
100
3
0
1996 1997 1998 1999 2000
95
90
2001 2002 2003 2004 20052
-20
1
85
-40
80
1999
2000
2001
CZK
• Exchange
relations as
disadvantaging
factor in 2005
2002
SKK
2003
2004
PLN
2005
2006
-60
HUF
Trade gain/loss from change in
exchange relations in CZK bn. (LH axis)
Dynamics of real gross domestic income
(year-on-year, %)
0
-1
The Czech foreign trade in 2000-2004 could enjoy very favourable exchange
relations, which in comparison to Poland, Hungary and Slovakia recorded the best
development and thus improved the Czech balance of trade. This effect (impact of
more favourable export prices development compared to import prices) was in case
41
of the CR enhanced by the structure of Czech foreign trade with majority of USD
import flows in comparison to dominant EUR export flows.
Exchange relations in the Czech Republic in the period 2000-2004 recorded a better
development in comparison to the other Central European countries, which further
strengthened the Czech trade balance. According to Eurostat exchange relations in
Czech foreign trade improved in 2004, compared to 2000, by considerable 5.1 pp
and in Polish foreign trade by 4.2 pp. On the contrary, moderate deterioration of
exchange relations was recorded by foreign trade of Hungary (-0.1 pp) and Slovakia
(-0.8 pp). Data for 2005 by countries have not been published so far.
• Trading loss
from exchange
relations in the last
year amounted to
CZK 36 billion and
reached its
maximum in the last
ten years
Anyway, subsequent negative development of exchange relations in Czech foreign
trade in 2005 caused trading losses10 amounting to CZK 36.0 billion (this figure
includes imports and exports of services). Export prices (y-o-y) began to decrease
since March, import prices rose in June, these proportions were strengthening and in
December 2005 the exchange relations were in y-o-y comparison worse by almost
6 %.
In 1996-2005 Czech economy suffered losses due to the exchange relations change
only in 1999 (- 6.0 billion), 2000 (-38.1 billion) and 2005 (CZK -36.0 billion). The
biggest profit from the development of exchange relations was recorded by the
Czech foreign trade in 1998, when the resulting trading profits amounted to CZK 60.6
billion. In 2003 and 2004 exchange relations influenced gross domestic income in a
limited extent only (trading profits in 2003 amounted to CZK 8.3 billion and in 2004
CZK 8.0 billion). Their positive influence peaked in 1998 and 2002, negative values
were achieved in 2000 and particularly in 2005.
Nevertheless, real gross domestic income in 2005 even with these losses increased
its y-o-y growth rate (to 4.8 % from 4.5 % in 2004). GDI was by the mentioned CZK
36 billion lower than GDP at average prices.
10
Trading profit / loss from changes in exchange relations is defined by formula T=(X-M)/P – (X/Px-M/Pm), where
X=import, M=export, P=average import and export deflator, Px=export deflator, Pm=import deflator.
42