The current account surplus widened by 10.6% m/m, but was down by 7.3% y/y to CZK31.2bn in March, according to data released by the CNB on Monday. The print was higher than market consensus for CZK20bn surplus. The main factor influencing the CA developments was the merchandise trade account, the surplus on which increased to CZK31.1bn in March from CZK25.2bn in February and was 7.8% higher than a year ago, which reflected the fact that the pace of increase of exports was stronger in monthly comparison and very close to that of imports, in annual comparison. At the same time, the primary income account reported CZK3.3bn deficit in March, down by 65.5% y/y, but turning from a surplus of CZK2.5bn in February – the CNB explained that the primary income balance included CZK4.1bn in dividends on direct investments. We may expect the primary income account to remain in deficit in the next couple of months as dividends on last years’ profits of main foreign controlled local companies and banks come due. Still, we overall do not expect much stronger deficits than those reported last year as although profits in 2016 grew, many companies, and especially major banks, approved lower dividends. The central bank said that the primary and secondary income included a surplus of CZK3.2bn on transfers from the EU budget to the Czech Republic, which may be indicative of improvement of EU funds (note that in February a surplus of CZK2.1bn on transfers from the Czech Republic to the EU budget was reported on the primary and secondary income account). We may expect this surplus to increase in the next months with the gradual acceleration of the drawing of EU funds under the new 2014-2020 programming period.
The financial account reported an outflow of CZK28bn in March, up from CZK26.4bn outflow in February with the increase reflecting the massive increase in international reserves to mirror the massive interventions of the CNB in the month (EUR19.3bn) aimed to defend its then EUR/CZK27 fx commitment. The CNB said that its own transactions (fx interventions) and transactions for its clients resulted in an increase in international reserves (adjusted for valuation differences) of CZK476bn in March. The other subcategories reported inflows in the month. The net FDI inflow amounted to CZK25.6bn in March whereas the reinvested earnings amounted to CZK8.3bn (same as in February). The reported CZK346bn inflow on the portfolio investment account reflected increasing banks’ liabilities in the form of short-term bonds and an increase in non-residents’ investment in CZK-denominated government bonds. Note that according to the finance ministry’s data, foreign investors held 47.3% of the total outstanding CZK-denominated government bonds as of end-March, up from 41.99% as of end-February. The strong interest in CZK-denominated assets, including government bonds was underpinned by the approaching end of the CNB’s ‘hard’ commitment to keep the fx cap floor until end-March and investors expecting high profits while betting on strong crown appreciation following the fx cap end. The inflow on the other investment account reached CZK 76bn mainly due to a change in the short-term international position of the banking sector (an increase in short-term assets), the CNB said.
The 12-month rolling current account reported CZK31.6bn surplus as of end-March, down from CZK34bn surplus as of end-February. Given the strong corporate and banks’ financial performance last year, as we said above we may expect the primary income account to continue reporting deficits in the next months, albeit not that high as last year as some companies and banks approved lower dividend payment, thus trimming the CA surpluses going forward. The CA surplus may be affected in the same direction by the merchandise trade developments – the merchandise trade surplus may decrease because of the crown’s firming after the fx cap end (which is however quite moderate for the time being), as well as by the potential lower external demand due to uncertainties related to the outcome of the elections in several EU countries coupled with stronger increase of imports on the back of the anticipated rebound in investments and even stronger household consumption growth. Net FDI reported an inflow of CZK203.5bn in the twelve months ending in March, up from CZK164bn in the twelve months ending in February, while the annual net portfolio investment total increased to CZK530.8m in the twelve months ending in March from CZK246.8bn in twelve months ending in February. 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 bonds even at negative yields. However, this did not happen and the crown’s exchange rate has been fluctuating quite moderately with the strongest firming reaching only 2% (against market expectations for 4% firming in next year after the fx cap end). As the CNB already ended its fx commitment, we may expect the acquisition of CZK-denominated bonds to markedly slow down in the next months. The latest CNB forecast assumes that the current account will remain at quite weak surplus of 0.3% of GDP this year (1.3% of GDP in the previous, February forecast) because of the expected crown 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.