Download Quo vadis?

Czech convergence
and impact of world
economic crises
on Czech republic
Ludek Niedermayer
Director, Consulting, Deloitte CR
December 2009
Czech convergence
(pre crises)
Success story, mainly in
this decade
12
250
10
200
8
150
Since start of this decade, very strong
performance of Czech economy
GDP in euros has doubled, macro
stability was preserved
Inflation was volatile but low, CA has
been supported by surplus of in
foreign trade
Inflation
6
100
GDP (USD)
4
50
2
0
0
199719981999200020012002200320042005200620072008
The key weakness was in the area of
publics policies
Even with around 5% growth of GDP,
the budged was not able to reach
„close to balance“
160
45
140
40
120
35
100
Total debt has increased to around
30% of GDP, but declining IR helped
to hold cost of debt service low
3
80
60
30
25
20
GDP (Euro)
15
Debt (Euro)
40
10
20
5
0
0
© 2009 Deloitte Czech Republic
FX played role
The economy was able to withhold
appreciation of REER in this decade
without creating large fragilities
With passing time, the „depreciation
cushion“ from start of the reform was
fading away, some types of the
production are not possible to do at
the Czech prices – economy is
gradualy changing structure
ECU/EUR
1/9/2009
1/1/2009
1/5/2008
1/9/2007
1/1/2007
1/5/2006
1/9/2005
1/1/2005
1/5/2004
1/9/2003
1/1/2003
1/5/2002
1/9/2001
1/1/2001
1/5/2000
1/9/1999
1/1/1999
1/5/1998
1/9/1997
1/1/1997
1/5/1996
1/9/1995
1/1/1995
1/5/1994
CZK was gradually appreciating
against euro, the key currency for
export and import (ex energy)
1/9/1993
Low inflation was reached mainly via
exchange rate channel (and flexibility
of the economy)
40
38
36
34
32
30
28
26
24
22
20
1/1/1993
Exporters handled
stress well
ECU/EUR
Linear ( ECU/EUR)
130
120
110
100
90
80
70
60
Volatility of the currency is recently of
more concern, as part of the economy
is supplying to very competitive
markets
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Recovery on the way? Impact of world economic crises on Czech republic and region
Období REER - deflator GDP (FT turnover, 2005=100
© 2009 Deloitte Czech Republic
Summary : The economy is strong in macro stability and
private sector, publics sector policies is lagging behind
• The key bottle necks of ČR
•
Weak fiscal situation, the fast growth of
revenues was hiding the budgetary
problems and was transformed into
permanent expenditures
•
Reform of pension system did not take
place
•
Just small changes in health care,
underestimated impact of demography
•
No euro strategy, ideology instead of
pragmatism
•
EU „schizophrenia“
• Relatively strong external position
(BoP and publics external debt) of ČR
•
There are some macro fragile countries
in the region, the others were partly
affected by regional sentiment
• Good indicators of financial stability
(loan to deposit ratio, FX lending, FX
financing)
• Asset bubbles not too evident
•
In some countries, high proportion of FX
lending, in some cases also impact of
weakness on the „owners“
• The crises also has shown up, the potential • But still, impact of the slow down visible
role of the government in the economy is
everywhere (asset quality decline,
larger than expected, and so the quality
temporary increase of fiscal deficits)
of publics service matters a lot…
•
5
Recovery on the way? Impact of world economic crises on Czech republic and region
All countries in the region do suffer from
large deficits, practically in no cases
financial system was collapsing
© 2009 Deloitte Czech Republic
Czech EU / Euro debate
45
40
35
30
25
Combination of:
20
Strong growth
15
2WK
3M
1Y
10
Low nominal IR
CZK excellent for storage of value
5
0
Skepticism of some parties about EU
Low willingness to consolidate publics finance
8
Lead to no enthusiasm about Eurozone entry
7
6
Even worse, the plan of social democratic
government (2009 or 2010) was canceled as
part of pre election campaign
5
4
5Y Bond
3
30Y Bond
2
But due to the structure of the economy, the
euro adoption is not as indifferent, as some
economists think.
6
1
0
Recovery on the way? Impact of world economic crises on Czech republic and region
© 2009 Deloitte Czech Republic
Czech economy
dealing with crises
From Golden years to crises
• Czech economy before crises reached
most likely peak of the cycle
25
20
• Fast CZK appreciation in 1H of 2009
created large problems for economy
15
10
5
0
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
-5
1996
• Economy – private or publics - was totally
unprepared for crises
-10
GPD CR
Capital formation CR
Exports CR
Consumption CR
• And politicians tried to play it down at the
beginning
GDP bil. CZK
• The result for 2009 GDP would be close to
5% decline, instead of 5% average growth
before the crises
4,000.0
3,500.0
3,000.0
2,500.0
2,000.0
1,500.0
1,000.0
8
Recovery on the way? Impact of world economic crises on Czech republic and region
© 2009 Deloitte Czech Republic
Czech recession
• Delayed start, but than large impact
• Wrong assumption (of the politician) about relative safety of the economy
•
Strong link to EU market (cars and EU exports)
•
High export to GDP proportion, high concentration
•
Citizens affected by information similarly to any other country
• Small space for government policy
•
Small countries have per se limited options, domestics demand stimulation does not work
•
On the contrary, mainly for „floaters“, the macro stability is key priority
• The hypotheses, that “new countries“ will be less affected, did not work. The output losses
will be substantial.
• In selecting government policies, not the stimulation of demand, but the support
of eemployment is the key measure
• In Czech, situation was complicated by political crises
• Since 2Q, there are signs of stabilisation of economy. Recovery could be slower than
expected, pre crises growth is “unlikely to be reach soon (if ever)“
9
Recovery on the way? Impact of world economic crises on Czech republic and region
© 2009 Deloitte Czech Republic
Crises – permanent loss of „value“ – read figures properly
GDP
110
Back on trend
(not always)
105
Loss
Pre crises growth
100
95
Turning point
Crises
Slower, post crises growth
90
85
2006
10
2007
2008
2009
Recovery on the way? Impact of world economic crises on Czech republic and region
2010
2011
2012
2013
© 2009 Deloitte Czech Republic
Deficit growth – money are gone
• More of debt means also higher interest
rates and thus problem for next budgets
• The impact of “not good policy” can be as
high as 30 bil. (almost 1% of GDP) for all
future budgets
• Reaching 60% of GDP debt means
permanent increase of debt service
of 70 bil. at current prices
• Comparison (data 2008)
•
•
•
Debt service
120
100
80
60
40
20
Social transfers – 54 mld.
•
Defence budget – 54 mld.
•
University expenditures – 26 mld.
0
Current "debt“ 30% GDP, interest 4%
So far there is no awareness of politicians
2011 optimistic (40% / 5%)
of possible problem
Higher interest rates(6%)
60% debt, at 5%
Adjustment 1% (GDP) per year is for most
of them too aggressive
11
Recovery on the way? Impact of world economic crises on Czech republic and region
© 2009 Deloitte Czech Republic
Short term outlook
 State of global economy better than expected, the financial sector is not great concern
 The world recovery should help to get Czech economy back to growth
 In the short run, the investments, construction and mainly labor market will slow down
Czech recovery
 Inflation in near term not source of concern, but longer horizon is less clear
 Still, being among the first countries starting with fiscal consolidation is good, the measures
taken are less good (and changes are even worse)
 Even in medium run, the potential of the economy is much lower than before crises
 So the policies must be adjusted to this fact
• Nevertheless, it seems that competitive position of the economy is preserved, but it
is one of the „most expensive“ in the region
• The problem is over capacity generated by global decline of the economy, so even
relatively competitive countries will benefit just partly from this position
• The situation can improve, but still, it is not clear, where is world heading
12
Recovery on the way? Impact of world economic crises on Czech republic and region
© 2009 Deloitte Czech Republic
Crises and CZK or
Euro (my view)
Floating CZK – great helper ?
• Weaker CZK helps. More volatile no
• Look at past
•
From mid 2007 to mid 2008, CZK has
appreciated from 28 to 23
ECU/EUR
30
29
28
27
26
ECU/EUR
25
•
The wage cost in Euro has increased
in magnitude of 25% during 12 month
24
23
• This episode has weakened the Czech
compatibility before the crises substantially
• Since start of the crises
•
Depreciation reached max of 25%, volatility
high
6
5.5
5
4.5
•
•
Now, CZK has corrected the stronger level,
but volatility is still hign
Interest rates higher, but not much
4
3.5
3
5Y Bond
30Y Bond
2.5
•
Hedging for exporters is difficult and expesive
2
• Euro is still (even more) priority for economy
14
Recovery on the way? Impact of world economic crises on Czech republic and region
© 2009 Deloitte Czech Republic
Impression from the crises
• Very similar impact of the crises to all „new member states“ (apart of Poland)
• Mainly among floaters different experience with FX regime:
•
Poland and Czech seems happy with their choice, Hungary (and maybe Romania) would benefit
from euro greatly
•
Also impact on banking sector very different. In some countries (mainly Hungary), FX regime
triggered large euro-isation of the banking balance sheets
• Nevertheless, the lessons (especially partial) from the event happening once in decades is
not good base for evaluation of the euro adoption
• Some more universal facts should be taken into account:
•
High growth in new members states has reduce gap between them and rest of EU. Adoption of the
euro is less risky
•
Links between new and old Europe are stronger, so the risk of asymmetrical shocks is lower
•
Crises have shown, that cost of volatility is higher than expected and due to lower liquidity of the
markets the hedging is more costly
• So in my option, in most cases, Euro in more appealing than before
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Recovery on the way? Impact of world economic crises on Czech republic and region
© 2009 Deloitte Czech Republic
Desirable or feasible ?
7
7
5
5
In most of the new member states,
the period of the robust growth was
not used for consolidation of fiscal
policy
3
3
And in some cases, fiscal policy was
pro cyclical
1
1
(yes and no, likely)
While is should be relatively easy to
consolidate after the crises, the
politicians have different view
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-1
-1
-3
-3
-5
-5
-7
-7
So fiscal can be major obstacle
While inflation can be also problem,
the other key concern is continuing
believe of some Eurozone members,
that enlargement can undermine the
credibility of the euro
GDP (%)
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Recovery on the way? Impact of world economic crises on Czech republic and region
Fiscal deficit (% GDP)
© 2009 Deloitte Czech Republic
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