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Czech Watch - 28 July 2000

28.7.2000 9:00

The Czech National Bank followed the Ministry of Finance and painted a rosy picture of the Czech economy in 2000 and 2001: growth will be higher and inflation lower then previously thought. While we share the CNB's opinion that the inflation remains under the control, we are not that optimistic and do not see inflation actually falling by the end of this year.
An independent analyst could almost feel a satisfaction, if he/she were not a taxpayer as well. The Cabinet has begun traditional annual ritual of blackmailing and brinkmanship as the deadline for the state budget blueprint is approaching. The Ministry of Finance used its now-standard method: it meekly increased social expenditures, as laws required it to do and cut everything else. Twenty-nine (out of thirty-six) central government agencies will see their budget falling in nominal terms. Useless to say, their respective ministers see themselves mainly as money distributors, so they object to any cuts and have not prepared any reform strategy to talk about. The winner is, though, the Minister of Labor who will see his budget rising by more than 7% (i.e. by CZK 16 bil., almost 1% of GDP). Expects some horse trading before the budget is submitted by the end of September.
So, the combative Czech koruna has survived it again. After a nervous trading amid the central bank board meeting, it strengthened in the evening to 35.55 CZK/EUR, the level it has been testing since mid July. As the euro was unable to hold its corner and weakened to 0.932 USD/EUR, the koruna duly followed and dipped below the 38 CZK/USD level once again.
Bond market was very quiet again, nervously waiting for the CNB press conference scheduled for 13.30 GMT. The comments from central bank were very bullish, confirming previous MoF forecasts, the market reacted slowly but the bullish trend was significant. Prices strengthened just prior to market close and reached the Friday levels, when the bearish trend started. As IRS are still dropping few bps after market close, the scenario for Friday seems to be clear - prices will probably reach the month's peaks, though the trading should be quite again after price's morning shift.
Current benchmark prices: MoF 6.75/05 99.95-25 (+25 bps), MoF 6.30/07 96.40-70 (+25 bps), MoF 6.40/10 95.85-15 (+15 bps).

(Ondrej Schneider and Dalimil Vyskovsky)

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