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Czech Watch – 1 October 2001

1.10.2001 10:55

- The CNB Board did not change central bank’s interest rates on its regular meeting last Thursday. The decision was in line with analysts´ expectations. Before the terrorist attack in the U.S. the situation was favorable for an interest rate hike in the Czech Republic. Since then, though, the Fed, ECB, Bank of Japan, Bank of England and other central banks have cut their interest rates and CNB does not want to make domestic interest rate differential even more attractive for speculative capital. Governor Zdenek Tuma said after the last CNB Board session that the CNB wanted to focus more on analyzing further wage developments. He added that, besides a significant growth in wages, growing household consumption and the government's expansive fiscal policy were prominent among future inflationary risks. The slow-down in the world economic growth can act in the opposite direction, noted Tuma. The CNB left interest rates unchanged because the Czech Republic's situation is different than that of most world countries because the Czech economy is in a different phase of the economic cycle, emphasized Tuma.

- The Czech Republic’s international investment position (i.e. the difference between its total foreign assets and liabilities) showed a deficit of CZK 188.8bn (EUR 5.6bn) at the end of 2001H1. The deficit was CZK 19.8bn wider than at the beginning of 2001 and CZK 68.1bn higher than a year earlier. The increase in the deficit was due to continuing FDI inflow. Assets of the banking sector account for 60 % of investment position assets. More than half of these assets was CNB international reserves. Domestic banks increased their short-term deposits with foreign banks and, to a lesser extent, also their volume of credits with maturities longer than one year granted to non-residents. The increase in portfolio investment assets is connected mainly with domestic bank investment in foreign bonds. Foreign direct investment was dominant in investment position liabilities, accounting for 51.3 % of total liabilities.

- The Czech Republic’s external debt totalled CZK 827bn (EUR 24.5bn), i.e. about 40.5 % of GDP at the end of 2001H1. The external debt was CZK 18.3bn higher than at the beginning of 2001 and CZK 44.8bn higher than a year earlier. The corporate sector (including foreign-owned companies) accounts for most of the external debt (56%). Commercial banks are the second important recipient of foreign funds. On the other hand, government sector and CNB are less significant debtors (responsible for about 4 % of the Czech foreign debt). The debt service volume is relatively stable (except for a large repayment of CNB bonds in Japanese yen in 2000H2). Debt service accounted for 8.5 % of the volume of Czech export (goods and services) in 2000H1.

- The Czech M2 money supply grew 12.8 % year-on-year in August 2001, after a 13.3 % rise in July. The volume of client loans at commercial banks and the CNB fell 2.9 % in August (after -2.3 % in July). The overall volume of crown and foreign currency deposits at banks was 15.2 % higher year-on-year in August (+16.6 pct in July). Crown-denominated demand deposits of households grew from CZK 229.7bn to CZK 234.3bn month-on-month in August, while time deposits were up from CZK 585.4bn to CZK 593.5bn.

- The Czech crown opened at about 37.00 against the dollar on Thursday and after some fluctuations during the day slightly strengthened compared to the opening level owing to worse than expected data on U.S. unemployment and industrial orders. Late on Thursday, CZK/USD was trading at 36.91/93, down from 36.79/81 a day earlier. Vis-a-vis the euro, the crown firmed during the first half of the Thursday’s session but a correction in the afternoon erased most its gains. Still, CZK/EUR closed at 33.88/91, up from 33.96/99 late on Wednesday.

- Bond prices grew again on Thursday. During the whole day, prices rose on the long end of the yield curve. The longest state 6.95/16 benchmark gained 75bps to 104.80/10, yielding 6.42/39 %. The state 6.75/05 added 15bps to 103.35/60, yielding 5.62/54 %. On Monday, the state bond 6.55/11 will be offered in an auction.

Late on September 27 bond yield Late on September 26
State 6.75/05103.35/605.62/54103.20/45
State 6.95/16104.80/106.42/39104.05/35

(Martin Kupka)

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