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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