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Czech public finance faces weak economy in 2012

Czech public finance faces weak economy in 2012

4.1.2012 11:11

Hungarian assets came under pressure as markets remain worried about further external financing after recent legislative steps. Especially, the new law on the Central Bank raises concern about its independence and the European Commission confirmed yesterday that it was not ready to renew talks with Hungarian Government, until it accepts its points. As a result the Hungarian forint moved above 316 EUR/HUF, the yield curve shot higher by 30-50 bps and CDS touched all time highs. The nervousness was further supported by speculations that MNB’s FX
reserves could be used to spur economic growth. The Government firmly rejected that idea, but it failed to reject that the reserves could be used to pay off 180 billion HUF of regional debt.

Looking ahead it may be difficult for Hungary to calm the markets without cooperation with IMF/EU. Although foreign exchange reserves are very solid (33.5 billions euros or around 140% of the short term external debt) and they can be used to pay back the immediate external liabilities, investors can still remain nervous. The global risk aversion could remain elevated due to euro-crisis, so countries with diminishing FX reserve could be punished by markets.

The Hungarian fear had once again impact on neighbouring markets. The Czech koruna broke above the 25.70 EUR/CZK level, helped by slightly worse outcome of last years budget (142.8 billion instead of 135 billion CZK). Nevertheless according to European ESA methodology the government surpassed the target with deficit of 3.7% GDP (versus planned 4.6% GDP). What is more worrying now is an outlook for the 2012 budget. It was based on 2.5% growth assumption and should be rewritten soon. No surprise that the Czech Finance ministry starts to talk about further austerity measures.

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