Bloomberg News

Czechs Stick to Deficit Cut as Debt Woes Threaten Recession

February 02, 2012

(Updates with market prices in fifth paragraph, adds new ministry quote in 12th.)

Feb. 1 (Bloomberg) -- The Czech government will stick to its budget-deficit reduction goal after the Finance Ministry cut the 2012 economic forecast to near-zero growth and didn’t rule out a recession because of the euro-area debt crisis.

Gross domestic product will expand 0.2 percent this year, according to the new forecasts published yesterday, less than the previous estimate of a 1 percent expansion. The new outlook carries “marked downward risks” because of uncertainty about developments in the euro area, which buys about 70 percent of Czech exports, the ministry said.

Lower growth will prompt spending cuts to meet the Cabinet’s deficit target, which has helped shield government bonds from the effects of the euro area’s sovereign-debt crisis. The budget adjustments will come from the government’s operational expenses and won’t require an amendment to the budget law, Kalousek said in an interview yesterday after the forecasts were released.

“Meeting the deficit targets remains a priority, even if the economic development is worse than the forecast and requires more measures,” Kalousek said. “Even though the new forecast has downside risks, it’s better than I had anticipated and the government will be able to carry out the corrections alone without the need to amend the budget.”

Bond Premium

The premium investors demand for holding the Czech 10-year government bond over a similar German security was 129 basis points, or 1.29 percentage points as of 9:48 a.m. in Prague, compared with 371 points for Poland, the largest eastern economy in the European Union, data compiled by Bloomberg show. The spread for euro-area member Slovakia was 272 basis points.

The cost of insuring against a Czech default is the second lowest in emerging Europe after euro-region member Estonia at 143 basis points, compared with 240 points for Poland, CMA’s data on credit-default swaps show.

The public-finance deficit, the fiscal yardstick for assessing a EU member’s readiness to adopt the euro, would account for as much as 3.8 percent of GDP this year if “measures” are not taken, compared with the target of 3.5 percent of GDP as set in the budget law, the Finance Ministry said.

Prime Minister Petr Necas’s plan to trim the budget gap to less than the EU’s limit of 3 percent of economic outlook by 2013 kept the Czech funding costs at the lowest level in emerging Europe while the koruna outperformed the Polish zloty and the Hungarian forint last year, according to data compiled by Bloomberg.

Spending Cuts

The 18-month-old government has cut state subsidies, reduced public wages, raised the value-added tax and increased the retirement age to overhaul public finances and slow down an increase in government debt, which, at 38 percent in 2010, was the smallest among the largest three post-communist economies in the EU.

The Finance Ministry estimates the total value of fiscal measures at 34 billion koruna ($1.76 billion) in 2012 and 59 billion koruna in 2013, with the biggest impact coming from the higher sales tax. The additional spending cuts may be between 20 billion koruna and 26 billion koruna this year, Kalousek said.

While the austerity measures will curtail GDP growth, economic developments will depend mainly on how Europe tackles the euro area’s debt crisis, the Finance Ministry said.

“Given the large openness of the economy, eventual negative external shocks are very likely to have a fundamental impact,” it said. “Therefore, it’s not possible in the current situation to rule out a repetition of the recession similar to the one from the turn of 2008 and 2009.”

Standard & Poor’s on Aug. 24 raised the Czech Republic’s long-term foreign-currency debt rating two steps to AA-, the fourth-highest grade and on a par with Japan. The upgrade reflected a change in rating criteria that highlighted the Czech government’s low indebtedness and the “prudently managed and balanced economy,” S&P said.

‘Adequately Conservative’

The economy will expand 1.6 percent next year, less than the previous forecast of a 2 percent expansion, the ministry said. It sees average inflation at 3.2 percent this year and 1.5 percent in 2013. Government-sector debt in 2012 will probably rise to 43.1 percent of GDP from an estimated 40.7 percent last year.

“It’s not a result we should rejoice over, but it doesn’t represent any disaster either,” Pavel Sobisek, a Prague-based analyst at UniCredit SpA, wrote in a report. “Overall we regard the Finance Ministry’s forecast as realistic and adequately conservative.”

The economy will expand 2.7 percent and 3.6 percent in 2014 and 2015, respectively, according to the forecast.

--With assistance from Krystof Chamonikolas in Prague. Editors: Douglas Lytle, Andrew Langley

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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