- We at Fitch Solutions have revised significantly lower our forecast for the Czech current account balance for 2022 from a deficit of 0.6% of GDP to 2.6%, largely owing to significant revisions made to historical data.
- Driving the deterioration in the Czech current account this year will be the Czech Republic’s worsening terms of trade, as well as the continued struggles of the key auto sector.
- Furthermore, the Czech National Bank’s decision to end Covid-19 related bank dividend restrictions in September 2021 will see the primary income deficit widen from 3.3% to 4.4% of GDP in 2022, bringing the component closer to its pre-pandemic level.
We at Fitch Solutions have revised significantly lower our forecast for the Czech current account balance for 2022, from a deficit of 0.6% of GDP to 2.6% of GDP (Bloomberg consensus: 0.7% deficit). Central to our updated projections is the considerable revision made by the Czech Statistical Office to historical figures, with the full year 2020 number lowered from a record surplus of 3.6% to just 2.0% and data for 2021 showing a deficit of 0.9%. A deterioration in the Czech Republic’s terms of trade, as well as headwinds to the autos sector will drive the widening of the deficit this year. Additionally, we anticipate high primary income outflows owing to the lifting of Covid-19 related bank dividend restrictions in September 2021. Risks to our forecasts are tilted to the downside, given persistent supply shocks that may drive import prices even higher and disrupt exports.
Wide Current Account Deficit Expected In 2022
Czech Republic – Current Account Balance & Components, % of GDP
Driving our revision is our expectation that spillover effects from the war in Ukraine will see the goods trade surplus narrow from 1.2% of GDP in 2021 to 0.2% of GDP in 2022. The latest available data shows the Czech Republic’s current account in a deficit of EUR705.0mn in March 2022, compared to a deficit of EUR238.9mn in February and a surplus of EUR316.6mn in January, before the war began. March’s current account deficit was driven mainly by a deeper primary income deficit and a deterioration in the goods trade balance. Data for the year-to-March show goods imports have grown by 16.2% y-o-y compared to 6.5% for exports. While inflationary pressures, in addition to tight monetary conditions, will cap import demand in volume terms, the impact of this will be offset by a rise in import prices linked to a spike in energy prices and persistent global supply-side issues. We expect import price inflation to remain elevated through year-end, natural gas prices have already doubled this year and our industry analyst expect Brent prices to remain elevated and average at USD100/bbl in 2022.
Import Price Growth To Outpace Export Price Growth
Czech Republic - Import & Export Prices, % chg y-o-y
At the same time, we expect a combination of weakened external demand and persistent supply chain issues to dampen export growth. The autos sector in particular is set to be impacted by a shortage of parts produced by Ukrainian manufacturers such as wire harnesses, while lockdowns in China will exacerbate semiconductor shortages. We note that the production of passenger cars in the Czech Republic in the year to April fell by 20.3% y-o-y. Finally, we expect demand from several of the Czech Republic’s major export markets, in particular Germany and Slovakia, to remain subdued in 2022 as these countries face economic headwinds of their own due to the war.
Trade Surplus To Narrow
Czech Republic - Exports & Imports (LHS) & Trade Balance (RHS), EURbn
We forecast a deepening of the primary income deficit from 3.3% of GDP in 2021 to 4.4% in 2022, bringing the component closer to its pre-pandemic average of 5.3%. We expect strong primary income outflows across H122 as a result of the Czech National Bank’s decision to end Covid-19 related restrictions on bank dividends in September 2021. While we anticipate an overall trend of strong outflows, the broader repatriation of profits from foreign own business is likely to be weaker in H222 with activity in the manufacturing sector set to be stunted by supply chain difficulties linked to the war in Ukraine and China’s zero Covid policy.
CNB's Substantial Reserves Limit External Financing Risks
Czech Republic - Net International Position & Components, EURbn
We remain of the view that risks facing the Czech Republic’s external financing position are low owing to the country’s large foreign reserves and our expectation that the pronounced widening of the current account deficit this year will not represent the beginning of a trend. As of April 2022, the Czech National Bank held reserves worth 60.7% of GDP. While the net international investment position was negative at -0.6% of GDP in Q421, foreign direct investment, which tends to be sticker, accounted for 52.4% of total liabilities. Tight monetary policy and the incumbent government’s commitment to fiscal consolidation will solidify the Czech Republic’s external financing position in the coming months.
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