The current account reported a CZK 27.4bn deficit in July, up from downwards revised CZK 11.6bn deficit in June and increasing by 23.1% y/y, according to data released by the CNB on Wednesday. The deterioration was broad-based with almost all major components contributing but secondary incomes, which deficit narrowed by 10% to CZK 4.6bn in July. The merchandise trade surplus narrowed by 25.4% y/y to CZK 4.5bn in July as exports growth of 5.4% y/y was slower than that of imports that increased by 6.3% y/y. The surplus on the services balance also decreased — by 3.3% y/y. At the same time, the deficit on the primary income account widened by 12.0% y/y to CZK 35.7bn in July whereas the dividends on direct investment amounted to CZK 38.2bn. We overall do not expect much higher primary account deficits than those reported last year as although profits in 2016 grew, many companies, and especially major banks, approved lower dividends on last years’ profits. The CNB comments that primary and secondary income included a surplus of CZK 0.1bn on transfers from the EU budget to the Czech Republic and a total of CZK 6.7bn was drawn from the EU budget on the capital account.
The financial account reported an inflow of CZK 22.5bn in July as compared to CZK 2.8bn outflow a year ago due to liabilities faster rise than assets. This was exclusively on account of foreign direct investments which reported CZK 23.0bn inflow in the month whereas net reinvested earnings amounted to CZK 8.9bn. Still, the CNB says that the annual net direct investment total has been flat in recent months. At the same time, the portfolio investment reported a huge outflow of CZK 198.1bn, which on the liabilities side was affected primarily by a decrease in banks’ liabilities in the form of short-term bonds amid an increase in accepted deposits. Other investment recorded an inflow of capital of CZK 202.2bn, mainly due to a change in the short-term international position of the banking sector, a rise in short-term assets in particular. The CNB also said that the carried out by the central bank transactions for its clients resulted in an increase in international reserves of CZK 7.6bn (adjusted for valuation differences).
The 12-month rolling current account reported CZK 39.2bn surplus as of end-July, down from CZK 44.3bn surplus as of end-June. We think that the deficits on the primary income account are to continue weighing on the CA balance going forward due to dividend payouts and a further downward influence may also be played by the merchandise trade developments. The merchandise trade surpluses may decrease in the next months because of the crown’s firming after the fx cap end and likely stronger increase of imports on the back of the anticipated strong domestic demand, both household consumption and investments. Net FDI reported an inflow of CZK 151.9bn in the twelve months ending in July, down from CZK 158.2bn in the twelve months ending in June, while the annualised net portfolio investment inflow decreased to CZK 387.8bn from CZK 464.5bn a month ago. Net portfolio investments have been showing a marked increase in the inflow of capital since late-2015 as foreign investors have been betting on significant profits in a Swiss-like scenario of crown development after the fx cap end and have been purchasing government securities even at negative yields. However, the expected scenario has not materialised thus far but as the crown gradually appreciates, we may expect speculators to start gradually unwinding their huge crown positions and the purchase of CZK-denominated bonds to slow down in the next months. The latest CNB forecast assumes that the current account will remain at quite weak surplus of 0.4% of GDP this year because of the expected crown’s firming that will somewhat hurt exports (despite the fact that exporters are largely hedged against exchange rate risk) and hence, merchandise trade as imports are meanwhile likely to resume stronger pace of increase due to expected to reinvigorate investments on the back of improved EU funds drawing.