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Czech Watch - 3 September 2001

3.9.2001 8:53

The Finance Ministry cut the planned 2002 budget deficit to CZK 52.2bn. The previous budget draft counted with a deficit of CZK 53bn. The cabinet will discuss the 2002 budget next Wednesday. Finance Minister Rusnok said the projected gap was definitive. "The only problem will be how to secure an extra CZK 4bn for the indexation of pensions, which is to come earlier than planned due to higher inflation," Rusnok added. Rusnok expects that the cabinet will obtain the missing sum from savings, or it will try to look for additional revenues. The budget is based on a projected GDP growth of 3.8 %, consumer price inflation of 4.6 % and unemployment rate of 8.2 %. The state budget deficit should drop to 2.3 % of GDP in 2002 from 4.5 % in 2001. The cabinet is scheduled to submit the final draft budget to the parliament by the end of September. Regarding this year’s state budget, Minister Rusnok promised that the government would not surpass the CZK 49bn deficit approved for 2001, and with some luck would even save money to cover the CZK 9bn hole from the 2000-budget. " The game is not lost yet", Rusnok said.

M2 money supply rose 13.3 % year-on-year in July, following a 13.1 % increase in June. The volume of client loans at commercial banks and the CNB dropped by 2.3 % year-on-year, after the same decrease in June. Crown and forex deposits at banks rose 16.6 % year-on-year in July (+16.5% in June). Crown-denominated demand deposits of households grew 0.4 % month-on-month, while term deposits increased by 0.3 %.

Finance Minister Rusnok told reporters on Friday that in his opinion a further increase in interest rates would not be beneficial for the Czech economy. "With my knowledge of inflation developments, I would consider such a move counter- productive in the next several months," Rusnok said. "The economy is able to cope with a slight increase in rates, but I would not recommend this in any case," continued Rusnok and added that an interest rate hike might undermine Czech economic growth and lead to an inflow of speculative capital, which could threaten the country's monetary stability. Rusnok stressed that the priorities of the central bank and of the government differ, but mutual communication was good. As regards privatization revenues in this year, Minister Rusnok believes that the cabinet receives money from privatization of the state’s stake in Komercni banka as soon as in October. “As regards Cesky Telecom, we are more likely to get paid in 2002Q1," admitted Rusnok but pointed out to the chance that the government receives proceeds from the sale of Ceske radiokomunikace and Jan Becher - Karlovarska Becherovka.

Czech Airlines (CSA) pilots and managers agreed on an increase in pilots' salaries on Thursday night, and pilots then called off a strike scheduled to begin Friday morning. Hence all flights will depart according to the timetable.

The Czech crown tracked the euro/dollar on Friday. Late on the day the crown/euro was close to late Thursday's level at 34.21/24. The crown/dollar fell to 37.64/66 from 37.42/44 late on Thursday.

Bond prices fell on the longer end due to profit-taking supported by hawkish central bank comments on Thursday and strong money supply growth reported on Friday. The longest state 6.95/16 bond dropped 15 basis points to 102.15/45 from Thursday's close, yielding 6.71/67 %. The state 6.75/05 lost 10bps to 101.80/10, yielding 6.14/04 %. The price losses were strongest at corporate bonds, though. Corporate issues had fallen 70-100bps and only partly recovered in the afternoon.

Late on August 31 bond yield Late on August 30
State 6.75/05101.80/106.14/04101.90/20
State 6.95/16102.15/456.71/67102.30/60

(Martin Kupka)

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