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Czech Watch – 4 June 2001

4.6.2001 8:47

- State budget deficit reached CZK 28.8bn by the end of May on revenues of CZK 230.6bn and expenditures of CZK 259.4bn. For the same period last year, the deficit was CZK 13.5bn billion. In May alone, the state budget posted a deficit of CZK 12.0bn, up from CZK 9.3bn in May 2000. The worsening was primarily due to higher expenditures. The higher spending included a CZK 4.2bn increase in non-investment transfers to regional budgets, CZK 3bn in reimbursements to clients of failed credit unions, or CZK 3.1bn paid out to farmers in compensation for damages suffered during last year's droughts. The social account deficit for January to May 2001 amounts to CZK 19.4bn, out of which the pension account gap makes up CZK 11.1bn or CZK 3.6bn above the plan. On the revenue side, lower dynamics of tax revenues, especially in the categories of VAT, consumption taxes and income taxes contributed to the widening of the budget gap.

- The Czech Republic preliminary closed the environment chapter during its negotiations with the EU and was granted three transition periods for the implementation of EU environmental legislation. A transition period (until 2010) was passed for the construction of water disposal plants in municipalities. The second transition period (until 2005) concerns EU requirements on handling packaging waste. The third transition period (until 2012) addresses a regulation on integrated prevention and pollution control and a regulation on large incinerators. The Czech Republic asked for only half the transition periods in the environment chapter than it had originally planned. Besides the environment chapter, also social policy chapter was closed, which raises the number of successfully closed chapters up to 18 (out of 30).

- The Czech Republic reached a 7-year transition period on sale of agricultural land to foreigners from the EU after the Czech Republic's EU entry and a 5-year transition period on sale of "secondary real estate" to foreigners. Acquiring farmland and forestland by individuals and legal entities from the other EU countries would not therefore be completely free during the transition period. But foreign companies and their branches that are entered in the Czech Company Register have already been free to buy land and real estate just as Czech companies. The Czech Republic originally applied for a 10-year transition period, but eventually agreed with 7 years and a revision clause which provides for assessment of the regime after 3 years of existence. The 5-year delay on the sale of "secondary real estate" means that foreigners will not be allowed during the transition period to buy houses, flats or recreational buildings in the Czech Republic unless they will have permanent residence there or will work in the country.

- The contract with the US investment bank J.P. Morgan to set the price for the failed IPB could be signed in two weeks. The appraisal will help define the price that CSOB will pay to the forced administrator for the takeover of IPB. J.P. Morgan will start working on the appraisal if it is found out that the two previous appraisals differ (which appears quite likely). J.P. Morgan is the first company on which CSOB and the administrator agreed.

- The Czech crown reached record highs against the euro on Friday, when it broke through 34.0 CZK/EUR several times. EUR weakness against USD combined with expectations of remarkable capital inflow owing to privatization of KB and Ceske radiokomunikace are creating a positive market mood for the crown, dealers say. CZK/EUR closed at 34.00/03 late on Friday, up from 34.12/15 late on Thursday. CZK/USD strengthened to 40.23/25 on Friday afternoon, from late Thursday's 40.36/38. On Thursday, CNB Vice-Governor Oldrich Dedek repeated that the bank would fight large fluctuations of the crown but would not try to break long-term trends.

- The 6.95/16 state bond dipped 5bps from late Thursday to 101.00/30 late Friday, yielding 6.83/80 %. The state 6.75/05 firmed five points to 103.40/70, yielding 5.69/60 %. On average, bond prices slightly fell, also because of state budget results. The key domestic indicator to be observed this week is CPI for May to be published next Friday.

Late on June 1 bond yield Late on May 31
State 6.75/05103.40/705.69/60103.35/65
State 6.95/16101.00/306.83/80101.05/35

(Martin Kupka)

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