Czech economy: ups and downs Eva Zamrazilová Member of the Board Czech National bank Conference on European Economic Integration 213 18 th 19 th November 213 Vienna
Czech Republic basic background EU member country outside Eurozone Monetary policy framework inflation targeting Small and open economy with limited (natural) resources Population of 1 mil. GDP per capita 2 5 USD Foreign trade turnover 14% of GDP Strongly dependent on foreign environment EU 9% of exports (3% Germany) High share of pro-cyclical industries 2
Basic story of previous two decades 8 6 4 2-2 -4-6 1994 1995 1996 199 1998 1999 2 21 22 23 24 25 26 2 28 29 21 211 212 GDP y/y, % First post-transformation recovery 1994 1996 May 199 monetary crisis followed by recession Banking crises and credit crunch 1998 22 Recovery as of 2 with growth peaking in 25 2 ( golden age ) Big slump (crisis) in 29 followed by moderate growth 21-211 Recovery after 6 quarters of recession in H2/213? 3
First post-transformation recovery 2 15 1 5-5 -1-15 GDP y/y, % Real eports, y/y, % Real imports, y/y, % 1996 199 1998 1999 2 21 22 23 24 25 26 2 28 29 21 211 212 Recovery 1994 1996 driven by domestic demand both consumer and investment Massive imports and corporate credit boom Strong inflow of foreign capital 1994 1995: CZK 2 billion of debt capital 25 2 15 1 5 1993 1994 1995 1996 199 1998 1999 2 21 22 23 24 25 26 2 28 29 21 2 11 212 credits total CZK bill. corporates, CZK bill. households, CZK bill. credits total,y/y, %, right axis corporates, y/y, %, right axis households, y/y, %, right axis 4 4 3 2 1-1 -2-3
.led to overheating and external imbalance 5 65 NFI_domestic 55 Import 45 35 25 15 5-5 -15-25 -35 ID GR -45 1994q1 199q1 2q1 23q1 26q1 29q1 212q1-1 -2-3 -4-5 -6 - Current account, % of GDP 1995 1996 199 1998 1999 2 21 22 23 24 25 26 2 28 29 21 211 212-1 -2-2 -2,1-2,4-2,4-2,4-2, -2,4-3,9-4,3-4,6-5,1-5 -5,3-6 -6-6,4 Growth and credit boom crowded in imports Massive imports led to external imbalance Subsamples correlations contemporaneous vs. (x t ;y t+4 ): until 1998q2 [`Transformation ]:.11 vs..96 *** 1998q3 2q4 [`Golden Age ]:.35 vs. -.2 28q1 213q2 [`Great Recession ]: -.4 vs. -.9 *** *** p <.1 5
which triggered May 199 monetary crisis Fixed ER & liberalization of financial account promoted the short-term capital inflow Signs of overheating visible as of 1996, CNB tightened monetary policy H2/96 Speculative attack on CZK (partly triggered by Asian contagion) Crisis revealed the weaknesses of monetary policy regime two goals (M2 and ER) Managed floating introduced (end of May 199) Introduction of Inflation targeting at the end of 199 22 2 18 16 14 12 1 8 6 4 2-2 3.11.1995 3.11.1996 2T repo Main policy rate 3.11.199 3.11.1998 3.11.1999 3.11.2 3.11.21 3.11.22 3.11.23 3.11.24 3.11.25 3.11.26 3.11.2 3.11.28 3.11.29 3.11.21 3.11.211 3.11.212 6
followed by banking sector crisis and credit crunch 25 2 15 1 5 1 9 9 3 1994 1 9 9 5 1996 1 9 9 1998 1 9 9 9 2 2 1 22 23 24 25 26 2 28 29 21 211 212 35 3 25 2 15 1 5 credits total CZK bill. NPL, eop.,% Corporates credits growth/boom up to 199 unsustainable NPLs around 3% Banking crisis and credit crunch 1998 22
Creditless recovery as of 1999 3 25 2 15 1 5-5 -1-15 GDP y/y, % credits, y/y, % Restoration of credit creation only after privatization of four big banks The gap between domestic savings and investment being filled with FDI Massive inflow of FDI boosted investment and exports 8
.followed by restoration of banks lending 25 2 15 1 5 1993 1994 1995 19 96 199 1998 19 99 2 2 1 22 23 2 4 25 26 2 28 2 9 21 211 2 12 credits total CZK bill. corporates, CZK bill. households, CZK bill. credits total,y/y, %, right axis corporates, y/y, %, right axis households, y/y, %, right axis Cleaning up the portfolios (strong decline in NPLs) Privatization of big banks sales to strategic foreign partners Restoration of banks lending during 21 23 4 3 2 1-1 -2-3 25 2 15 1 5 1993 1 9 94 1 9 9 5 1 9 96 199 1 9 98 1 9 9 9 2 21 2 2 2 3 24 25 credits total CZK bill. 2 6 2 28 2 9 2 1 2 11 212 NPL, eop.,% 35 3 25 2 15 1 5 9
which did not provoke external imbalances Exports boosted driven by FDI inflow and forthcoming EU accession Trade balance with EU turned to surpluses as of 1999 Trade surpluses have continued in growth since 24 1
Golden age 25 2 12 1 8 6 4 2 1994 1996 1998 2 22 24 26 28 21 212 corporates, CZK bill. households, CZK bill. Companies benefited from flourishing external demand Household consumption driven by record high consumer confidence Change in behavioural patterns combined with easy access to credit led to high growth of credits to households In spite of high credit growth, the ratio Credits/GDP has not reached the former level (around 6%) 11
led to overheating on the housing market US Case-Shiller index Bubble on the housing market seems evident in the hindsight Unsustainable if the crisis and the lesson from subprime mortgage had not come? 12
..hopefully the bubble burst just in time Percentage sold 1 9 8 6 5 4 3 2 1-6 -3 3 6 Days after completion Total 26 2 28 29 21 211 NPLs in the sector of developers have stabilized in H/213 (below 1%) NPLs in the sector of households stable around 5% Refinancing at low rate levels risks after return to normal MP? 13
Crisis recovery recession Positive contribution of net exports overweighted by weak domestic demand Weak consumer demand decline in real income and uncertainty Investment worst hit down by 25% in comparison with the peak (Q1 28) links to FDI? 14
The role of FDI revisited 2 1-1 -2-3 -4 1993 1994 1995 1996 199 Trade balance, CZK bill. 1998 1999 2 21 22 23 24 25 26 2 28 29 21 211 212 Balance of incomes, CZK bill. 25 2 15 1 5 18 16 184 22 141 111 4 8 3 58 64 61 52 3 6 68 6 11 16 33 8 41 38 219 21 2 21 22 23 24 25 26 2 28 29 21 211 212 Reinvestments (CZK bill.) FDI stock (in % of GDP)-right axis Dividends (CZK bill.) 85 8,, 6, 5, 4, 3, 2, 1,, Foreign controlled companies generate approx. one third of total investments Sharp change in foreign investors behavior as of 28 From reinvestments to repatriations of profits: No free lunch Uncertain future ahead not only export demand but also investments are affected by multinationals 15
The crisis revealed vulnerabilities Vital dependence on foreign demand has been the main cause of prolonged weaknesses Vulnerabilities on the supply side concentration matters Institutional weaknesses Despite adverse condition, financial system has remained stable 16
that monetary policy reaction cannot overcome Policyinterest ratesintheczechrepublic 6 5 4 Lombard rate 2Wrepo rate Discount rate 3 2 1 1/2 1/3 1/4 1/5 1/6 1/ 1/8 1/9 1/1 1/11 1/12 Transmission weaker than in normal times After reaching the ZLB exchange rate started to be used for further easing Policy mix is expected to be better balanced (212: tight fiscal and easy monetary policy) 1
Crisis of confidence seems to be over? 18
Thank you for your attention Eva Zamrazilová Member of the Board Czech National bank eva.zamrazilova@cnb.cz