Current account turns to CZK2.9bn deficit in Czech Republic

The current account reported CZK2.9bn deficit in May after the CZK14.3bn surplus in April and the CZK1.6bn surplus a year ago, according to data released by the CNB on Friday. The main factor influencing the CA developments in May was the reported deficits on the primary and secondary income accounts, the central bank said. The deficit on the primary income account increased more than fivefold m/m to CZK28bn in May and was up by 10.8% y/y.

The CNB explained that the primary income balance included CZK23.1bn in dividends on direct investment, markedly up from CZK4.9bn paid in April. 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 higher 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 central bank also said that the primary and secondary income included a deficit of CZK2bn on transfers from the Czech Republic to the EU budget (a CZK0.2bn surplus on transfers to the Czech Republic from the EU budget was reported in April), which may be indicative of monthly slowdown of EU funds drawing in May.

Still, we may expect a surplus of transfers from the EU budget to the Czech Republic to be reported in the next months with the gradual acceleration of the drawing of EU funds under the new 2014-2020 programming period. Otherwise, the surplus on the merchandise trade balance widened by 32.9% m/m and by 5.4% y/y to CZK24.7bn in May, which reflected the fact that the pace of increase of exports was stronger than that of imports in monthly comparison and similar in annual comparison. We see that this development is quite positive and indicating that foreign markets are mostly interested in the quality of the exported by the Czech Republic merchandise that at its price as meanwhile the crown’s exchange rate has appreciated by 1.0% m/m and by 1.7% y/y.

The financial account reported an inflow of CZK2.7bn in May after CZK76bn outflow in April to reflect liabilities rising faster than assets. In particular, the inflow of net FDI of CZK8.8bn was much higher than that in April with the net reinvested earnings amounting to CZK10.2bn. At the same time, the portfolio investment account reported an outflow of CZK25.9bn (much lower than the reported CZK229bn outflow in April) with the outflow mainly due to fall in banks’ liabilities in the form of short-term bonds, which was partly offset by higher holdings of CZK-denominated bonds by non-residents.

Note that according to the finance ministry’s data, foreign investors held 46.09% of the total outstanding CZK-denominated government bonds as of end-May, up from 45.44% as of end-April. The inflow on other investment of CZK25.7bn (CZK227bn inflow reported in April) reflected change in the short-term international position of the banking sector. The central bank said that its transactions for its clients resulted in an increase in international reserves of CZK10.8bn (adjusted for valuation differences). Recall that in April the CNB’s own transactions (foreign exchange interventions – worth EUR653m) and transactions for its clients resulted in international reserves increase by CZK76.3bn.

The 12-month rolling current account reported CZK48.6bn surplus as of end-May, down from CZK53.1bn surplus as of end-April. Given the strong corporate and banks’ financial performance last year, as mentioned 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 payments.

Nevertheless, the deficits on the primary income account are to continue weighing on the CA balance going forward. A downward influence on the CA balance 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 – the crown is on gradual appreciation trend and has firmed by up to 3.7% since April against the former EUR/CZK27 fx cap (it firmed by 1.1% m/m and by 3.0% y/y in June alone). Moreover, the likely to be stronger increase of imports on the back of the anticipated investments’ recovery and even stronger household consumption growth will also constrain the CA from reporting surpluses in next months.

Net FDI reported an inflow of CZK175.1bn in the twelve months ending in May, down from CZK178.6bn in the twelve months ending in April, while the annualized net portfolio investment inflow decreased marginally to CKZ 362bn in the twelve months ending in May from CZK362.4bn in the twelve months ending in April. 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, the expected scenario did not materialize and the crown’s exchange rate has been fluctuating quite moderately with the strongest firming since Apr 6 reaching 3.7%. As the crown gradually appreciates, we may expect speculators to start gradually unwinding their huge crown positions and the acquisition of CZK-denominated bonds to markedly slowdown 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’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.

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