Despite it acknowledges that the Czech Republic “pursued sane and sober economic policies“ D. Roche’s article from March 28 published on your journal’s website (see:< http://online.wsj.com/article/SB123819932316462089.html >) leads to the conclusion on risks faced by the CEECs financial system that have very weak grounds in the facts in the case of Czech Republic. This stems from the neglect of many differences distinguishing the Czech financial system from those of its more or less distant neighbors in CEE.
The article focuses on the risks stemming from the spending spree fuelled by forex loans of households and companies financed by the inflow of foreign funds presumably of parent financial groups in the local banks they own in the region. In the Czech case, the only item corresponding to the assertions in the previous section is the fact that loan creation was quite fast in the previous years, reaching above 20%. However, this fast loan creation was financed by domestic deposits and provided in the Czech currency. Consequently, the Czech banking as a whole is the only net creditor of foreign, mainly parental groups, in the region, with the net credit position of roughly 13 bn USD. The loan to deposit ratio of Czech banking remains still below 100%, at 76%. Thanks to the fact that koruna rates hovered around and mainly below euro rates over recent years, household loans in forex currency are virtually non-existent, the corporate forex loans mainly covered the export oriented investments and reach slightly above 8% of GDP. This is hardly a surprising figure in the very open economy exporting almost 80% of its GDP. These figures implicate that total foreign currency loans of corporations could be covered with less than two months of exports. In addition to this, the banks hold foreign currency deposits of about 7.5% of GDP, the imbalance of forex loans and deposits in the Czech commercial banks is thus roughly -0.5% of GDP. In other words, there are no major forex imbalances on the balance sheet of the Czech economy and given the forex flows are supported by the foreign trade surplus, even the current account imbalance remains very low (currently around 3 % of GDP). The foreign financing needed in this and in the coming years oscillates around 9 bn USD each year, around ¼ of central bank forex reserves. To sum it up, any weakening of the Czech currency provides a stimulus to the Czech economy except, of course, it may lead to inflationary pressures that the Czech National Bank is to control. Given the inflation is currently at 2% and core inflation around 1%, this is hardly a major worry in these days.
Therefore the reader (or at least myself) can be in the case of the Czech economy mightily mystified by the author’s assertions that “without (obviously foreign - my comment) capital funding to tide them over“ our households and corporations are “going to default” “with potential “massive” losses “ranging up to 6% of GDP in the Czech Republic” and those losses “would … take out around 40% of foreign-exchange reserves in … the Czech Republic“. On the other hand, I was braced for this surprise few lines above reading how “currencies have fallen like a stone as capital flows reversed“. A polite reminder of facts to the benefit of the author, the Czech koruna has ended 2.5% weaker today than at the beginning of this year while the market was digesting news of Hungarian debt downgrade…
Miroslav Singer
Vice-Governor