Watching the developments on capital markets in Hungary one must inevitably ask about the risks to the Czech Republic. At the first sight the twin deficit issue seems to be even more daunting in the latter country, with an expected 2003 public deficit of -7.5% GDP, and its current-account deficit of 7.2% of GDP compares unfavorably to Hungary’s expected 2003 public deficit of 5.3% of GDP, and 2003 current-account deficit of 4.0% of GDP. Nevertheless, we expect FDI to remain strong in the Czech Republic, resulting in a lower vulnerability to hot money compared to Hungary, where the flow of portfolio investments into bonds is the major source of current-account deficit financing.
Also, the Czech currency, the koruna, unlike the Hungarian forint, does not face the risk associated with a somewhat puzzling central-bank policy, and the co-ordination of fiscal and monetary policy might currently be perceived as better in the Czech Republic as well.
Such are the reasons why, should Hungarian equities continue to suffer price weakening due to macroeconomic concerns, we would expect only a limited spill-over effect in Czech equities. What remains key for Prague Stock Exchange blue chips is a reduced upside from the bottom-up point of view; currently we have no “buy” recommendations on Czech equities, we “hold” Philip Morris CR, and we “accumulate” the remaining blue-chip titles.
Jiří Soustružník