Bloomberg News

Czech Cabinet Drafts Crisis Plan After Cutting GDP Outlook

November 01, 2011

(Updates new forecasts in second paragraph.)

Oct. 31 (Bloomberg) -- The Czech government is preparing crisis scenarios to make sure it can continue trimming the budget deficit next year as the economy expands less than previously forecast, Finance Minister Miroslav Kalousek said.

The Finance Ministry in Prague cut the 2012 economic growth forecast to 1 percent from 2.5 percent, which was the basis for calculating next year’s budget. This year’s economic outlook was reduced to 2.1 percent, from 2.5 percent due to a “worsening of the global economic situation,” the ministry said in a quarterly update of its forecasts today.

Premier Petr Necas’s Cabinet wants to avoid a repeat of 2009, when the worst economic recession since the fall of communism hurt state finances and widened the fiscal deficit. Necas’ pledge to cut the public-finance gap to less than the European Union’s limit of 3 percent of economic output by 2013 has helped Czech bonds outperform German debt in the past year.

“What we are working on are three or four crisis scenarios, with 1 percent growth being the optimistic one,” Kalousek said in a debate on the public Czech Television yesterday. “I would be very happy if the economy grew 1 percent next year, and I worry that it won’t be the case, that the January forecast will be again significantly worse than the one from October.”

Export Dependence

The Czech economy is dependent on EU demand for its exports, which include Skoda Auto AS vehicles and car parts. The 27-member bloc purchases about 80 percent of Czech exports, with Germany alone accounting for a third.

Yield on the Czech koruna-denominated state bond maturing in 2021 fell 45 basis points, or 0.45 percentage point, in the past year, compared with a 43 basis-point decline in the yield on German government securities with a similar maturity, according to data compiled by Bloomberg.

The koruna has gained 0.8 percent to the euro since the start of the year, the best performance among 25 emerging-market currencies tracked by Bloomberg. The Czech currency weakened 0.5 percent to trade at 24.816 to the euro as of 2:46 p.m. in Prague.

Slowing Growth

Gross domestic product growth eased in the second quarter for the first time since a 2009 recession as a slowdown in the EU damped demand for exports and government austerity measures curbed domestic spending. GDP rose 2.2 percent in the April-June period from a year earlier, after expanding 2.8 percent in the first three months. The economy expanded 2.2 percent last year.

A slowdown in economic growth to 1 percent would widen the deficit by about 17 billion koruna ($972 million) next year, which the government would be able to compensate for with spending cuts without amending the budget law, Kalousek said.

“Nevertheless, we have to prepare for it to be worse, which means we are also working on crisis scenarios, including a so called catastrophic scenario that will foresee a deep recession for next year,” he said.

The scenarios, which should be ready by the end of the year, will envisage measures on revenue and expenditure sides aimed at preventing a widening of the deficit, Kalousek said, without elaborating.

This year’s public-finance shortfall will be 3.7 percent of GDP, down from the original target of 4.6 percent and compared with a 5.8 percent deficit in 2009, the Finance Ministry said in its macroeconomic forecasts. It sees the 2012 deficit at 3.2 percent of economic output, which would be less than the target of to 3.5 percent set in the budget draft that is now in parliament.

The deficit will narrow this year partly because of smaller debt-servicing costs as interest rates on state debt were lower than what the ministry had budgeted for, it said in the statement.

--Editors: Alan Crosby, Balazs Penz

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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