Balance of payments results for the second quarter were published today. Current account deficit widened to USD 386 mil. from USD 336 mil. in Q1/00 and from USD 80 mil. in Q2/99. The entire widening stemmed from a deeper trade deficit (USD 650 mil. in Q2/00, as opposed to USD 210 mil. in Q2/99). The result is not a surprise (Patria forecast was a deficit of USD 450 mil., however a consensus indicated a lower deficit of USD 170 mil.) and reflects thriving domestic demand. For the whole year, we expect the current account to reach USD 1.9 bil. (3.7% of GDP), i.e. a safe level. Next year, the current account deficit will grow further, to 4.5-5.0% of GDP.
While it is often assumed that a current account deficit in excess of 4% spells troubles for an economy, we believe it may not be the case in the Czech Republic. Next year, at least. So far, the FDI inflow is massive - almost USD 5 bil. last year, expected 5.5 bil this year and perhaps USD 4 bil. in 2001 - and easily finances the entire current account deficit with stable investment, not inclined to flee as first problems appear. Thus, as long as the Czech Republic remains to be a sought after investment placeit can easily afford a current account deficit. When the inflow slows down (as it eventually will), a time for adjustment will come. It can come in two forms: through a higher competitiveness of Czech products that would limit the trade deficit, or through depreciation. Jury is still out on this issue.