Overall stability has persisted for the Czech Koruna since country independence in 1993 with replacement of the former currency notes of Czechoslovakia when the former communist country split into two nations peacefully, the Czech Republic and the Slovak Republic. As a new NATO member, the Czech Republic and its 10.2 million citizens have made great strides since former Czech president Vaclav Havel took over power and led the Velvet Revolution against communism in 1989. The Czech Republic has surprised many as being one of the best performing former Soviet satellite states with relative prosperity. However, by year 1997, the Czech Republic encountered currency pressures resulting in a modest depreciation due to difficulties switching to an open market based economy from the former command economy under communist rule.
POLITICS: government of Prime Minister Vladimir Spidla (elected in June 2002 of the Czech Social Democratric Party) and President Vaclav Klaus (replaced former President Vaclav Havel and elected by lawmakers in March 2003, Klaus represents the right-wing Civic Democratic Party ) representing a three party slim coalition government majority with two smaller political parties including the centrist Christian Democrats and the centre right-wing Freedom Unity party. The future as stated by Prime Minister Spidla is for the Czech Republic to become a modern welfare state while attaining membership to the European Union ‘EU’ of which it was invited to join in December 2002 with formal acceptance expected in 2004. On June 15, 2003, the government received a 77 percent YES vote for EU membership in a national referendum. During the 1990’s, elements of corruption and cronyism with government officials as the new political system of freedom & democracy matures as evidence with greater product selection in the stores of consumer goods. Growing pains in the Czech economy over the last decade has resulted in a rise of support for the Communist Party of whom finished in a very respectable third position in parliamentary elections in June 2002 as many citizens voted for social justice and increased social security. It is believed that the rise in Communist Party support will not derail the country’s EU bid although the current government holds a very slim majority.
ECONOMY: during the 1990’s, the economy performed relatively well with stability and prosperity, good growth mixed in with low unemployment. However, no transition from former state control to free market open economy does not escape without tough times. The Czech economy was struggling with recession and having difficulty integrating with the West and meeting European Union (EU) requirements during a 3 year recession from 1997-99. For the most part, privatizations and the move to market modern economy has been a success for the Czech Republic. The economy is diversified with a strong manufacturing sector and skilled workforce participating industries such as machinery, autos, metals, chemicals, food products, etc. The government is also in planning to reduce corporate taxes to 24 percent by year 2006. From 1999 forward, the Czech economy has been recovering with steady growth and large levels of foreign direct investment ‘FDI’ taking advantage of privatizations. By year 2002-03, the economy has slowed but still performing quite well. The Czech economy depends heavily on tourism with approximately 10 million visitors a year spending their money, year 2002 was an off year with widespread floods costing the Republic $3 billion USD in damages plus loss of tourism receipts.
Economic Statistics
GDP as measured by PPP is at $156 billion USD, GDP/Capita at $15,300 USD. GDP market at $65 billion USD. Year 2004 GDP growth projected at 4 percent, 2003 at 2.2 percent estimated, year 2002 came in at 2.5 percent, 2001 at 3.5 percent, 2000 at 3.8 percent, 1999 was low at 0.5 percent. Inflation for 2002 was measured at a very low 0.6 percent, 2001 at 4.1 percent, 1997 at 10 percent for comparison. Year 2003 inflation is estimated at 0.8 percent as interest rates have been lowered in the Czech Republic to help stimulate domestic demand. The current account deficit has been a persistant difficulty as it is currently running at 5 to 6 percent of GDP, to be financed by continued high FDI. Year 1996 deficit was also high at 8 percent of GDP, 1999 improved to 2.8 percent shortfall, 2000 grew again to 5.2 percent, 2001 at 4.5 percent, 2002 at 6.6 percent, 2003 current account shortfall estimated at 5.4 percent and 2004 projected at 4.6 percent. Year 2000 and 2001 FDI totalled an impressive $5 billion USD equivalent with year 2002 increasing to a very impressive $7 billion USD as European Union convergence nears. Year 2002 trade deficit at $2.4 billion USD. A real constraint is the looming persistant large fiscal deficit position with 2002 at 9 percent of GDP with local banks helpng to finance the shortfall, year 2003 is projected at 6.5 percent which is better but still unsustainable, 1997 was only 2 pecent for comparison. External debt is at $26 billion USD (2003). Unemployment at 10 percent for 2002.
POSITIVE: large number of Internet and cellular phone users, beneficiary of Russian natural gas transshipment revenues as pipelines run across the Czech Republic, public debt is still relatively low and manageable although increasing. CONCERN: aging population, level of taxation is too high, large increase in household debt, floods - environment, transshipment centre for Asian heroin, net energy importer with Russian conglomerate Gazprom a major supplier of natural gas, pension system difficulties.
BANKING SYSTEM: developing and modernizing with personal credit including credit cards, mortgages and loans which is aiding domestic demand. Problems existed back in the late 1990’s due to exposures from the Russian financial crisis in 1998 which accordingly uncovered weaknesses in the Czech banking system thus prompting the government to relaunch the bank privatization program. In June 1999, the government sold the fourth largest bank as the Czech banking system was becoming too great a cost to taxpayers as many state-owned banks were then bailed out by the government. Further, the Czech banking system was privatizing and was indeed considered weak. An estimated 30 percent of all bank loans in the country were insolvent during the late 1990’s with questionable lending reflects many companies on the verge of bankruptcy. Insolvent bank restructuring and cleaning up the Czech banking system will cost upwards of 20 percent of GDP. July 2003 official reserve assets at $25.19 billion USD equivalent to 6 months import coverage. As the Koruna appreciated in 2002, the Czech National Bank ‘CNB’ cut interest rates and bought foreign exchange. The central bank has similar inflation goals with the eurozone preparing for entry in the next year.
REGIONAL ANALYSIS: Slovakia, EU, Poland
For further information on the region, please read ‘SLOVAK REPUBLIC’ in this BI.C currency index. The European Union is the largest export market for the Czech Republic with Germany as the largest buyer and trade partner. Poland surprisingly shares similar macroeconomic features as the Czech Republic and remains in the first tier group along with Hungary as all three countries attain EU membership.
KNOWLEDGE: in the late 1990’s, currency speculators were taking advantage of interest rate differentials with much higher Czech rates by borrowing in USD and converting proceeds to Korunas. Investors were making an interest rate spread plus a bonus when the Koruna was appreciating. Now today, this spread is not as attractive with the eurozone as the Czech National Bank surprised the market in July 2003 and lowered the repo rate to 2 percent, same level as the eurozone. Threats to the Koruna exist in the Czech Republic’s difficult fiscal and current account deficit position. It was not for high FDI levels, the Koruna would be very vulnerable to a large depreciation exchange adjustment . Over the last few years, the Czech Republic has been a leading destination for FDI as large net capital inflows are averaging $4 billion USD/year complimented by a vibrant large tourism industry although disrupted in 2002 due to flooding.
CURRENCY: ISO Symbol ‘CZK’, Czech Koruna, Czech crown. At time of review on September 2, 2003, the Koruna had an exchange value of 29.81 CZK to the USD and August 2003 average valuation verus the euro was at 32.37 CZK to 1 EUR As of August 29, 2003 as measured by purchasing power parity, the Koruna was 52 percent undervalued versus the USD. In April 2003 the Economist magazine’s unscientific but remarkably interesting Big Mac index had the Czech Koruna 28 percent undervalued versus the USD as measured by purchasing power parity, burgernomics as they suggest is quite delicious. The currency follows that of a floating exchange rate regime and is convertible. The Koruna was forced out of a trading band in 1996 and eventually forced to float after the Czech National Bank (‘CNB’) spent $3 billion USD trying to defend the band but ultimately failed. In mid 1997, the Czech Koruna was under that of a managed float tied tied to the German Deutschmark and accordingly against the euro (‘EUR’) in 1999. Today, CNB follows an inflation targeting band for the Koruna with year 2005 inflation target band set at 2 to 4 percent inflation. In relation to the EUR, the Koruna was traded in a very stable range since the euro’s inception on January 1, 1999 within a trading range of 30 to 35 CZK to 1 EUR. For currency traders, some analysts remain mildly bearish on the Koruna versus the EUR over the short term. During year 2002, the Koruna was appreciating versus the USD and year to date up until August 2003, the Koruna is up 5 percent against the USD.
CURRENCY HISTORY: historical valuations include year 1993 at 29.15 CZK to 1 USD, 1994 at 28.78, 1995 at 26.54, August 1996 at 26.45, August 1997 at 34.08, October 1998 at 29.10, year 1998 average at 32.28, June 1999 at 35.72, May 2000 at 40.30, July 2002 at 29.96, June 2003 at 26.89. The Koruna has appreciated in the area of 30 percent to the USD since the USD & US equity markets peaked in spring 2000. During the 20th century, the original Czech Koruna was introduced in 1919. Various currencies in use consisted of the German Reichsmarks, new Koruna, Pengos, Polish Zloty, Slovak Koruna and the current Czech Koruna in circulation. Before currency inception for the current Czech Koruna in 1993, Czechoslovak exchange rates were followed.
CURRENCY FORECAST: adoption of the EUR most likely in 2007 as new national currency after participation of ERM2 for 2 years expected in 2004-05 where the Czech Koruna will fluctuate within a tight trading band versus the euro. In the short term, various modest risks include political instability as the current coalition government hangs onto a slim 1 seat majority on power trying to implement a reform package to force the fiscal deficit lower to 4 percent of GDP by 2006 and eventually meeting 3 percent Maastricht deficit guidelines readying the Czech Republic for EU acceptance. A sharp devaluation or currency collapse is very unlikely. Year-end 2002 short term debt is at $9.4 billion USD which is more than adequately covered by the Czech Republics large official reserve position. Other economic risks that are prevalent as discussed include the unsustainable current account and fiscal deficit which may create severe difficulties if GDP growth slows or FDI dries up. However, at present large FDI inflows are in tact as many investors & speculators are buying Korunas as an EU currency convergence play which has taken place over the last 2 years. Question is, will this euphoria remain?
UPDATED: September 2, 2003.
