## _cr12115 ## Source details **Canonical URL:** [_cr12115](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12115.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12115.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12115.pdf.json) --- ### Recent Developments - Growth and demand - Real GDP: declined marginally in the last two quarters of 2011. - GDP growth for 2011: 1.7 percent (down from 2.7 percent in 2010). - Domestic demand remains about 7 percent below its peak following the 2009 recession. - Labor market improvement weak; moderate output gap remains. - Inflation and wages - Inflation hovered slightly below the 2 percent target for most of 2011; increased towards end-2011 and spiked to 3.7 percent in early 2012 (driven by one-off VAT adjustment and food and energy prices). - Real wages increased by a modest ¼ percent in 2011, implying largely stable unit labor costs. - External sector - External current account deficit in 2011: 3 percent of GDP (unchanged from previous year). - Trade surplus increased by about 1 percent of GDP. - Income deficit reached a record 7.3 percent of GDP, reflecting accrued profits on inward direct investment. - Financing of the current account deficit: about two thirds covered by direct investment, mainly retained earnings. - Fiscal and monetary - Overall deficit in 2011: 3.8 percent of GDP (improved from 4.8 percent in 2010). - Structural balance improved by about one percentage point in 2011. - Public debt to GDP ratio at end-2011: 41.5 percent. - Policy rate: 0.75 percent since May 2010. - Floating exchange rate remains main shock absorber; koruna traded in line with neighbors in 2011 with lower volatility, depreciated moderately in Q4 2011 before recovering in 2012. - Financial markets - Sovereign risk premium rose somewhat in H2 2011 but remained well below 2009 highs. - Long-term government bond yields in local currency remained below 4.5 percent during late 2011 and averaged 3.5 percent in March. ### Outlook and Risks - Growth and demand projections - Economic activity expected to remain flat in 2012 and gradually gain momentum in 2013. - Domestic demand expected to remain anemic short run; unemployment expected to increase marginally as the output gap widens. - Recovery expected as external conditions improve from H2 2012 with a balanced composition between external and domestic demand. - Inflation and current account outlook - Inflation forecast to average slightly above 3 percent in 2012, but below the 2 percent target in 2013. - Current account deficit expected to remain well-contained. - Main risks - Spillovers from the euro area: exports to the EU accounted for about 83 percent of all exports and 59 percent of Czech GDP in the last two years. - Intensification of the sovereign debt crisis in Europe could cause abrupt deleveraging by (or failures in) euro area banks, harming domestic credit conditions via parent-subsidiary linkages. - Other risks: commodity price shocks and real estate market cycle. ### Fiscal Policy: Achievements, Plans, and Debate - Recent measures and outcomes - Since 2010: higher VAT and excise rates, social assistance reforms, pension changes, and restraint of current expenditure. - Laws passed on unification of VAT, pension, healthcare, and social benefits reforms. - Authorities committed to government headline deficit target of below 3 percent of GDP in 2013; intermediate target: reduce headline deficit to 3.5 percent in 2012. - Authorities announced an expenditure freeze expected to yield 0.6 percent of GDP improvement in 2012 budget result. - Staff recommendations vs. authorities’ stance - Staff argued against additional procyclical tightening in 2012; recommended letting automatic stabilizers operate fully and projected meeting 2012 target without further cuts. - Authorities insisted on additional consolidation to meet EDP targets, maintain low bond yields and market confidence. - Medium-term plans and measures under consideration (2012–14) with estimated savings (percent of GDP) - Readjusting VAT rates: 0.35 - 0.45 - Introducing a new PIT bracket for high incomes: 0.08 - 0.10 - Increase in PIT rate: 0.30 - 0.40 - Introducing a carbon tax: 0.05 - 0.10 - Temporarily change in pension indexation formula: 0.30 - 0.50 - Fiscal objectives - Government policy statement of 2010 envisaged a balanced budget in 2016. - Authorities considering additional revenue-side measures in 2013 and 2014. - If defined contribution second pillar introduced in 2013 as planned, associated revenue shortfalls could imply total structural adjustment of 0.5 percent of GDP in that year under unchanged nominal EDP target. ### Pension Reform: Fiscal Implications - Parametric changes adopted in 2011 - Increased statutory retirement age; reduced disability pensions; curtailed progressivity in contribution assessment; extended insurance period for full pension. - Long-term PAYG deficits reduced from 4-5 percent to around 2 percent of GDP in 2040-60, and to less than 1 percent of GDP from 2070. - Voluntary defined-contribution second pillar (planned) - For volunteers: 3 percentage points of the current public social security contribution of 28 percent of wages will be diverted to personal accounts; each insured person will add an additional 2 percentage points from own funds. - Fiscal impact on PAYG deficit estimated at CZK 10 billion in 2013 (about ¼ percent of GDP), and an additional CZK 5 billion for both 2014 and 2015, with significant uncertainty. ### Fiscal Framework Options and Recommendations - Current MTBF: three-year rolling budget for general government with nominal expenditure ceilings; weaknesses include lack of durable anchor, weak enforcement, limited coverage. - Staff recommendation - Structural balance rule for general government with a debt brake and an escape clause; allow automatic stabilizers to operate and align with supranational rules. - Strengthen legislative support, monitoring and enforcement, clear roles, local government borrowing constraints, and establish a fiscal council for independent forecasts and compliance monitoring. - Authorities’ proposal under consideration - Multiple targets enshrined in a constitutional act with separate numerical constraints for general government, central government, local government, and health insurance funds. - Staff warning: risk of budget fragmentation, complexity, reduced transparency and accountability. ### Monetary Policy: Stance, Options, and Assessment - Current stance - Policy rate: 0.75 percent since May 2010; stance judged appropriately supportive of activity within the inflation-targeting framework. - Floating exchange rate serves as main shock absorber. - Expectations well-contained despite an inflation spike; yield curve consistent with a stable policy rate in the near term. - Inflation dynamics and recommended bias - Staff: historically low rates appropriate; an easing bias may usefully complement stance. - Staff projects inflation to overshoot target in 2012 and reach 3.5 percent (mostly due to VAT adjustment); projects inflation to fall slightly below target in 2013. - Against backdrop of negative output gap and subdued wages, staff sees merit in shifting to an easing bias. - Zero-bound and unconventional tools (disinflationary adverse scenarios) - Options discussed: commitment to keeping policy rates low for an extended period; quantitative easing; intervening in the foreign exchange market. - Principal criteria: effectiveness and ease of return to standard framework. - Staff view: systemic liquidity surplus and low long-term rates limit effectiveness of first two tools; given exchange rate channel importance, regular and preannounced foreign exchange interventions suggested if exchange rate fails to respond to negative shocks. - Reserves adequate but not high by standard metrics; unsterilized interventions can expand monetary base and limit currency appreciation. - Authorities broadly agreed but regarded disinflationary environment likelihood as rather low. ### Exchange Rate and External Sector Assessment (Box 4) - Exchange rate regime - Free floating exchange rate functions as main absorber of external shocks; koruna broadly in line with fundamentals per CGER estimates. - Koruna long-term appreciation trend sustained after 2008-09 swing; ULC-based real exchange rate growth more subdued. - Exports grew sufficiently to keep market share stable in the last three years. - Persistent current account deficits driven by large income transfers on stock of direct investment; NFA excluding direct investment stocks is positive. ### Financial Sector Soundness, FSAP Findings, and Risks - Soundness and resilience - Czech banks highly profitable and self-financed with low loan-to-deposit ratios and strong capital and liquidity buffers. - Regulatory capital to risk-weighted assets: 11.6 / 14.0 / 15.3 / 15.3 (selected years). - Non-performing loans have increased after 2009 crisis but remain manageable at 5.5 percent. - Domestic credit growth increased to about 5½ percent in 2011; lending margins declined; loan growth outpaced deposit growth. - Stress testing and spillovers - Stress tests (including a large GDP drop about twice 2009 and parent bank failures) found system resilient; only combined large GDP drop and parent bank failures pushes capitalization below regulatory limit—shortfall of about 2 percent of GDP. - Main risks stem from negative developments in the euro area; Czech banking system has a net external creditor position reducing rapid deleveraging risk. - CNB tightened reporting requirements on transactions between parents and subsidiaries; planned reduction of intra-group exposure limit from 100 percent to 50 percent of bank capital from July 2012. - FSAP recommendations (Box 5) - Strengthen legal setting for CNB financial stability mandate. - Maintain and consider expanding extraordinary reporting; consider firm-specific prudential measures if foreign parent banks deteriorate. - Address supervisory resource weaknesses; formalize macro-prudential decision-making. - Strengthen crisis management and bank resolution (enlarge deposit insurance fund, clarify payout triggers, operationalize use of public funds for exceptional support). ### Key Banking and Financial Soundness Metrics (select figures as presented) - Number of banks: 37 39 41 44 (time series entries) - of which foreign controlled: 30 32 33 36 - Assets (percent of GDP): 105.1 109.5 111.0 117.5 - Client loans to deposits (percent): 80.9 77.8 78.0 79.4 - Net interest income (percent of assets): 2.49 2.51 2.52 2.53 - Regulatory capital to risk-weighted assets: 11.6 14.0 15.3 15.3 - Return on equity: 20.7 26.4 19.7 18.7 - Liquid assets to total assets: 25.8 27.1 29.4 30.5 - Provisions to nonperforming loans: 57.4 49.7 47.9 49.4 - Nonperforming loans to total gross loans: 2.8 4.6 5.4 5.5 ### Structural Reforms and Growth Strategy - Need for reforms - Convergence of Czech per capita output towards Germany has stalled; accelerating structural reforms critical to boost potential growth. - Key priorities: reduce cumbersome business regulations; improve education and human capital; address labor market rigidities; strengthen technology and scientific infrastructure; improve institutions and governance. - Government reform strategy (adopted September 2011) - Result-oriented reforms with empirical evaluation and concrete proposals (“scorecards”) for more than 40 projects across nine pillars: innovation, financial markets, labor markets, education, healthcare, macroeconomics, infrastructure, institutions, enterprise and market for goods and services. - Export strategy developed to reduce reliance on core European markets; twelve priority markets selected: Brazil, China, India, Iraq, Kazakhstan, Mexico, Russia, Serbia, Turkey, Ukraine, the United States, and Vietnam. - Implementation challenges: coordination across many line ministries; monitoring by Competitiveness Council; coordination with corporate sector and universities critical. ### Staff Appraisal and Policy Guidance - Fiscal and reform assessment - Significant progress in tackling medium-term fiscal challenges; staff welcomes pension reform and VAT adjustments. - Continuation of pension, health, and tax reforms important for long-term public sector sustainability. - Short-run guidance - Short-run fiscal policy should balance consolidation and avoiding overly contractionary stance. - Staff believes letting automatic stabilizers operate fully in 2012 is appropriate; if outlook worsens, planned fiscal consolidation could be replaced, particularly in 2013. - Consideration could be given to a structural balance rule for general government, augmented with a debt brake, with appropriately wide coverage and an independent fiscal council to foster implementation. ### Debt and External Sustainability (Annex II highlights) - Public sector debt (percent of GDP) baseline projections: 28.0 (2007); 28.7 (2008); 34.3 (2009); 37.6 (2010); 41.5 (2011); 43.9 (2012); 45.4 (2013); 46.2 (2014); 46.6 (2015); 46.9 (2016); 47.1 (2017). - Debt-stabilizing primary balance: -0.2 - Gross financing need (percent of GDP): 4.8 (2007); 6.6 (2008); 10.4 (2009); 9.3 (2010); 9.7 (2011); 9.6 (2012); 9.4 (2013); 9.1 (2014); 8.8 (2015); 8.6 (2016); 8.4 (2017). - External debt (percent of GDP) baseline: 42.2 (2007); 37.4 (2008); 45.5 (2009); 48.3 (2010); 47.7 (2011); 48.7 (2012); 48.6 (2013); 48.9 (2014); 49.3 (2015); 49.6 (2016); 50.3 (2017). - External debt vulnerabilities examined via bound tests including interest-rate shocks, growth shocks, current account shocks, combined shocks, and a one-time 30 percent real depreciation. ### Risk Assessment Matrix (Annex I summary) - Intensification of euro area crisis - Likelihood: Medium - Expected Impact: High - Key points: lower export demand, potential disruptive deleveraging and capital outflows from Czech subsidiaries, rollover difficulties for short-term debt. - Gradual deleveraging by euro area banks - Likelihood: Medium - Expected Impact: Low - Rapid increases in commodity prices - Likelihood: Medium - Expected Impact: Low - Sharp falls in property prices - Likelihood: Low - Expected Impact: High - Safe-haven inflows to Czech assets - Likelihood: Low - Expected Impact: High ### Data Provision and Statistical Assessment - Data standards and timeliness - Czech Republic subscribed to SDDS in April 1998; metadata and annual observance reports for 2006–9 posted on Fund’s DSBB. - High-frequency variables: exchange rates and CNB interest rates reported daily; reserves reported monthly with a one-week lag and on 10-day basis; CPI, monetary aggregates, interest rates, central government fiscal accounts, and foreign trade reported monthly with lags between one and four weeks. - GDP and balance of payments: quarterly with a lag of two to three months. - Data quality weaknesses - Underestimation of value added in small-scale private sector due to tax evasion and underdeveloped collection mechanisms. - Discrepancies between production and expenditure-based GDP estimates; quarterly national accounts subject to bias from nonresponse and lumping. - External trade statistics: lack of fixed base price indices for exports and imports. - Monetary survey: large variations in interbank clearing account float require caution. - Timeliness matrix (as of April 12, 2012) includes specific latest observation dates and reporting frequencies for key series (exchange rates 4/16/12; international reserve assets Mar. 2012; CPI Mar. 2012; GDP 2011 Q4; gross external debt 2011 Q4). ### Executive Director Statement (summary) - Growth and outlook - Real GDP growth: 1.7 percent in 2011; end-2011 economy entered a mild recession in line with euro area. - Authorities’ growth expectations: 2012: 0 - 0.2 percent; 2013: 1.3 - 1.9 percent. - Unemployment: 6.7 percent in 2011; may rise to 7.2 percent in 2013. - External and reserves - End-2011 net international investment position: -49 percent of GDP. - Foreign direct investment liabilities: 56 percent of total external liabilities. - Foreign exchange reserves: 22 percent of GDP; cover 43 percent of all external debt liabilities of domestic entities; cover 23 percent of total banking sector assets; cover 3.6 months of imports. - Banking sector - Loan-to-deposit ratio: 73 percent. - ROE: above 20 percent in recent years. - CAR: around 15 percent. - NPL share: 6.4 percent (leveling up). - Provisioning: almost 60 percent of non-collateralized loans provisioned. - Stress tests: sector resilient; capitalization remains above regulatory minimum under significantly adverse scenarios. - Fiscal consolidation and measures - Fiscal deficit trajectory: 2012: reach 3.0 percent of GDP; 2013: 2.9 percent; 2014: 1.9 percent. - Gross general government debt in 2011: 41.2 percent of GDP. - April 11, 2012 package includes expenditure rationalization and revenue measures (VAT and PIT increases, surcharges for high-income earners, new taxes including a carbon tax, and other measures). - Government intends a constitutional fiscal responsibility act by end-2012 to establish an independent fiscal council, a debt ceiling, and fiscal rules for all government levels. - Structural reforms - Pension reform: three-pillar system with voluntary second defined-contribution pillar planned for 2013. - Health care reform: phased implementation with first phase effective 1 December 2011; second phase effective 1 April 2012; third phase being prepared. - Social benefit reform: effective 1 January 2012. *Source: CZECH REPUBLIC — 2012 ARTICLE IV REPORT (excerpted content unit _cr12115).* ### 1. Selected Economic Indicators, 2007–13 _______________________________________________________ 25 ### 1. Selected Economic Indicators, 2007–13 ### Recent Developments (Context A) - Post-crisis recovery stalled in the second half of 2011 as exports lost momentum; expansion since the 2009 recession was almost exclusively export-driven while domestic demand stagnated and stands about 7 percent below its peak. - Labor market improvement has been weak and a moderate output gap remains. - Real GDP: - Declined marginally in the last two quarters of 2011. - GDP growth for 2011: 1.7 percent (down from 2.7 percent in 2010). - Inflation: - Hovered slightly below the 2 percent target for most of 2011. - Increased towards end-2011 and spiked to 3.7 percent in early 2012, driven by a one-off VAT adjustment and food and energy prices. - Real wages: increased by a modest ¼ percent in 2011, implying largely stable unit labor costs. - External current account and trade: - External current account deficit in 2011: 3 percent of GDP (unchanged from previous year). - Trade surplus increased by about 1 percent of GDP. - Income deficit reached a record 7.3 percent of GDP, reflecting accrued profits on the existing stock of inward direct investment. - Financing of the current account deficit: about two thirds covered by direct investment, mainly retained earnings of foreign-owned firms. - Fiscal position: - Overall deficit in 2011: 3.8 percent of GDP (improved from 4.8 percent in 2010). - Structural balance improved by about one percentage point in 2011. - Public debt to GDP ratio at end-2011: 41.5 percent. - Policies geared toward additional structural consolidation with a 0.8 percent of GDP improvement planned for 2012 (led by a VAT adjustment and expenditure restraint). - Monetary conditions: - Policy rate: 0.75 percent since May 2010. - Yield curve consistent with a stable policy rate in the next few months (as of early 2012). - Floating exchange rate remains main shock absorber; koruna traded in line with neighboring currencies in 2011 with lower volatility and depreciated moderately in Q4 2011 before recovering in 2012. - Financial markets and sovereign risk: - Sovereign risk premium increased somewhat in H2 2011 but remained well below 2009 highs and compares favorably with regional peers and most euro area countries. - Long-term government bond yields in local currency remained below 4.5 percent during late 2011 and averaged 3.5 percent in March (year not explicitly restated in the source). ### Outlook and Risks (Context B) - Growth and demand: - Economic activity expected to remain flat in 2012 and gradually gain momentum in 2013. - Projected euro area recession will constrain exports in 2012. - Domestic demand expected to remain anemic in the short run due to low confidence and fiscal consolidation. - Unemployment expected to increase marginally as the output gap widens. - Recovery expected as external conditions improve from H2 2012, with a balanced composition between external and domestic demand. - Inflation and current account: - Inflation forecast to average slightly above 3 percent in 2012, but below the 2 percent target in 2013. - Current account deficit expected to remain well-contained. - Main risks: - Spillovers from the euro area via trade and bank channels; exports to the EU accounted for about 83 percent of all exports and 59 percent of Czech GDP in the last two years. - A deeper euro area recession or decline in foreign demand would further depress the export-dependent economy. - Intensification of the sovereign debt crisis in Europe could cause abrupt deleveraging by (or failures in) euro area banks, adversely affecting domestic credit conditions and banking sector health via parent-subsidiary linkages. - Other risks: commodity price shocks and the real estate market cycle. ### Policy Discussions — Summary Themes - Focused on: - Appropriate policies to address medium-term fiscal challenges. - Ensuring financial stability amid challenging external conditions. - Safeguarding the successful monetary policy framework while keeping policy flexibility. - Enhancing growth potential through structural reforms. ### Fiscal Policy (Box 1 and related discussion) - Achievements and measures: - Significant progress made in tackling medium-term fiscal challenges and improving the structural balance since the last Article IV consultation. - Policies since 2010 included higher VAT and excise rates, social assistance reforms, pension system changes, and restraint of current expenditure. - Laws passed on unification of VAT, pension, healthcare, and social benefits reforms. - Fiscal results and targets: - Authorities committed to a government headline deficit target of below 3 percent of GDP in 2013 (as agreed with the European Commission under the EDP). - Intermediate target: reduce headline deficit to 3.5 percent in 2012. - Authorities announced an expenditure freeze in late February (year implied 2012) expected to yield an improvement of 0.6 percent of GDP in the 2012 budget result. - Staff recommendations vs. authorities’ stance: - Staff argued against additional procyclical tightening in 2012 and recommended letting automatic stabilizers operate fully; staff projected meeting the 2012 budget target without further expenditure cuts and preferred executing the 2012 budget as is even if the target were missed. - Authorities disagreed, citing financial risks, political commitments, the need to meet EDP targets to exit the EDP, and electoral mandates; they emphasized maintaining low bond yields and market confidence. - Medium-term plans: - Government policy statement of 2010 envisaged a balanced budget in 2016. - Authorities considering additional measures in 2013 and 2014, mainly on the revenue side (possible VAT adjustments and a personal income tax increase). - If the defined contribution second pillar of pension system is introduced in 2013 as planned, associated revenue shortfalls could imply a total structural adjustment of 0.5 percent of GDP in that year under an unchanged nominal EDP target. - Measures under consideration (2012–14) and estimated savings (percent of GDP): - Readjusting VAT rates: 0.35 - 0.45 - Introducing a new PIT bracket for high incomes: 0.08 - 0.10 - Increase in PIT rate: 0.30 - 0.40 - Introducing a carbon tax: 0.05 - 0.10 - Temporarily change in pension indexation formula: 0.30 - 0.50 ### Pension Reform Fiscal Implications (Box 2) - Parametric changes (adopted in 2011) improved PAYG sustainability: - Increased statutory retirement age, reduced disability pensions, curtailed progressivity in contribution assessment, extended insurance period for full pension. - Long-term PAYG deficits reduced from 4-5 percent to around 2 percent of GDP in 2040-60, and to less than 1 percent of GDP from 2070. - Introduction of voluntary defined-contribution second pillar: - For volunteers, 3 percentage points of the current public social security contribution of 28 percent of wages will be diverted to personal accounts; each insured person will add an additional 2 percentage points from own funds. - Fiscal impact on PAYG deficit estimated at CZK 10 billion in 2013 (about ¼ percent of GDP), and an additional CZK 5 billion for both 2014 and 2015, with significant uncertainty around these estimates. ### Fiscal Framework Options and Recommendations (Box 3) - Current framework: - Medium-term budget framework (MTBF) is a three-year rolling budget for general government; derives nominal expenditure ceilings for central government and six state funds. - Weaknesses: lack of durable fiscal anchor, weak enforcement and independent monitoring, limited coverage (local governments and social security funds not explicitly covered). - Staff view: - Recommend a structural balance rule for general government with a debt brake and an escape clause; the rule would allow automatic stabilizers to operate and align with supranational rules. - Key implementation challenge: transparent and robust estimation of the output gap. - Recommend stronger legislative support, effective monitoring and enforcement, clear roles and responsibilities, borrowing constraints for local governments, and a fiscal council to monitor compliance and produce independent forecasts. - Authorities’ proposal under consideration: - Framework with multiple targets enshrined in a constitutional act, imposing separate numerical constraints for general government, central government, local government, and health insurance funds. - Staff warning: risk of budget fragmentation, complexity, reduced transparency and accountability. ### Monetary Policy (beginning of Section B and Box 1 overview) - Monetary stance and instruments: - Policy rate: 0.75 percent since May 2010. - Policy considered appropriately supportive of economic activity. - Floating exchange rate serves as main shock absorber. - Expectations remained well-contained despite an inflation spike; yield curve consistent with a stable policy rate in the near term. - Financial stability monitoring: - Continued monitoring of risks to the banking system from credit portfolios and foreign parent banks; monitoring of transactions with foreign parent banks was intensified. *Source: CZECH REPUBLIC — 2012 ARTICLE IV REPORT, INTERNATIONAL MONETARY FUND* ### 15. Historically low rates remain ### 15. Historically low rates remain ### Inflation, output gap, and monetary stance - Historically low rates remain appropriate in the context of the forward-looking inflation targeting framework and the negative output gap, and an easing bias may usefully complement this stance. - Inflation is projected to overshoot the inflation target of 2 percent in 2012 and reach 3.5 percent. However, this is mostly due to the VAT adjustment, which is beyond monetary policy’s influence. - Commodity prices are the main source of inflation in the period ahead. - There are no signs of demand-side inflation pressures, and wage growth is subdued against still high unemployment. - Medium-run inflation expectations have continued to converge towards the target. - Staff projects that inflation will fall slightly below the target in 2013, and euro area developments and fiscal tightening highlight further downside risks. - Against this background staff sees merit in shifting to an easing bias to sustain the benefits of a strongly expansionary monetary policy. ### Czech National Bank stance and risks - The Czech National Bank (CNB) sees risks to inflation as broadly balanced and maintains a neutral bias. - The consensus view of the CNB at the time of the discussions was that the current high rate of inflation and the koruna posed upside risks, while the negative output gap posed downside risks. - Since the discussions, the koruna has appreciated and is no longer seen as an upside risk for inflation, but commodity prices have risen rapidly in the same period to emerge as a short-term inflationary factor. - The authorities agreed that there are no emerging macroprudential risks associated with the low rates, as lending remains subdued across categories and asset prices remain within historical norms. - The authorities reiterated the benefits of a flexible policy stance, including the possibility of further easing if downside risks intensify. ### Unconventional monetary options (disinflationary adverse scenarios) - Given the low policy rate, staff discussed with the authorities options for unconventional policy measures in the context of disinflationary adverse scenarios. The options include: - a commitment to keeping policy rates low for an extended period, - quantitative easing, and - intervening in the foreign exchange market. - Principal considerations in choosing among instruments are their effectiveness and the ease of return to the standard inflation targeting framework. - A systemic liquidity surplus in the banking system and already low long-term rates suggest that the first two tools are likely to be limited in effectiveness. - Given the importance of the exchange rate channel for the economy, staff suggested the possible use of regular and preannounced foreign exchange interventions, in particular, in case the exchange rate fails to fully respond to negative shocks. - Reserves are adequate but not high by the standard metrics and can accommodate such interventions. - Unsterilized interventions can both expand the monetary base and limit currency appreciation. - The authorities broadly agreed with these considerations, while noting that they saw the likelihood of such a disinflationary environment rather low. ### Exchange rate regime and external assessment (Box 4) - The free floating exchange rate regime continues to function as a factor of support for macroeconomic stability. - The exchange rate has functioned as the main absorber of external shocks, and together with limited foreign exchange mismatches, it has facilitated the implementation of an independent and effective monetary policy. - Staff and the authorities agreed that the koruna exchange rate is broadly in line with its fundamentals. This is confirmed by: - a stable market share in world markets, - a moderate current account deficit, - a relative price level that is consistent with the country’s income level, - estimates based on the CGER methodology (Box 4). - The government has not announced a target date for euro adoption. Box 4 key findings (External Sector Assessment) - The koruna has continued on a long-term appreciation trend. Following the large swing in 2008-09, the koruna has sustained a moderate appreciation trend in both nominal and real terms, with fluctuations around this path coming from global risk sentiment. ULC-based real exchange rate growth has been more subdued suggesting that a large part of the appreciation is absorbed by favorable wage productivity dynamics. - Despite the long-term appreciation trend, Czech Republic’s price level seems to be in line with what would be expected given its income level. - Exports grew at a sufficient pace to keep market share stable in the last three years. Following earlier robust gains, market share of Czech exports has broadly stabilized in the last three years. - Persistent current account deficits have led to a deteriorating net foreign asset position. Despite consistent trade surpluses, large income transfers on the stock of direct investment lead to a moderate current account deficit. In recent years, NFA has deteriorated under the influence of current account deficits, but not at a pace or scale that would suggest competitiveness problems. In addition, NFA excluding the direct investment stocks is positive, which mitigates the vulnerabilities associated with the external position. - Staff estimates based on the CGER methodology suggest the koruna is broadly around equilibrium value as well. ### Financial sector soundness and risks - Czech banks are highly profitable and self-financed with low loan-to-deposit ratios and strong capital and liquidity buffers. - The banks can comfortably satisfy current and future supervisory standards, specifically Basel III and CRD4. - Non-performing loans have increased after the 2009 crisis, but remain manageable at 5.5 percent. - Subdued credit growth is mostly due to prudence in both demand and supply sides of the credit market. - Consumers and corporates are not overly indebted by international comparison and banks continue to expand in profitable lending activities. - Domestic credit growth increased to about 5½ percent in 2011, lending margins declined, and loan growth outpaced deposit growth, suggesting little deleveraging. - Comfortable liquidity and very limited currency mismatches in final borrowers’ balance sheets suggest that the system is robust. - Sharp property price falls could pose a risk, but recent moderation of price declines and partial reversal of earlier increases reduce this likelihood. An increase in new mortgage loan volumes is supportive of the real estate market. Systemic and external spillover risks - Main risks stem from negative developments in the euro area, which would affect Czech subsidiaries of euro area parent groups. - The Czech banking system has a net external creditor position, which reduces the risks of rapid deleveraging. - Group-wide capital scarcity could set a higher threshold for new lending in terms of profitability and risk taking. - Funneling capital and liquidity out from the Czech subsidiaries to parent group banks is another plausible scenario, but only under extreme stress and uncertainty. - The CNB has tightened reporting requirements on transactions between parents and subsidiaries. - A range of stress tests using simulated shocks (including a large drop in GDP about twice the magnitude of the 2009 crisis, a protracted stagnation, and failures in parent banks) found the system would be resilient. Only when a large GDP drop and parent bank failures are combined does system-wide capitalization fall below the regulatory limit—a shortfall of about 2 percent of GDP. Authorities’ preparedness and policy actions - The CNB has strengthened macroprudential supervision by setting up a separate department and allocating more resources. - Liquidity provision framework strengthened since the 2009 crisis with a standing collateralized liquidity window. - Authorities stand ready to take bank-specific prudential measures, should the need arise. - Amendments to the CNB Law broadening the CNB’s mandate have been sent to the parliament and are expected to be adopted later in 2012. - Legal amendments regulating the activities of credit unions are under preparation. - The limit on banks’ exposures to parent groups are planned to be reduced from 100 percent to 50 percent of bank capital from July 2012. - Work is ongoing to strengthen the macro-prudential policy framework and stress testing. Box 5 key findings and recommendations (FSAP) - CNB mandate: Strengthen the legal setting for the CNB financial stability mandate; elevate financial stability beyond a supporting element of achieving price stability. - Prudential requirements: Maintain and consider expanding extraordinary reporting requirements; in event of deterioration in foreign parent banks consider firm-specific prudential measures including increased capital and liquidity requirements, pre-approval of significant intra-group transactions, and reducing intra-group limits. - Supervisory resources: Regulatory and supervisory framework generally sound; identified weaknesses relate mainly to inadequate resources of the CNB. - Macro-prudential policy framework: Formalize the decision-making mechanism on macro-prudential policy issues. - Crisis management and bank resolution: Strengthen elements including enlarging the deposit insurance fund, clarifying payout triggers, and operationalizing the use of public funds to provide exceptional support to banks. Key banking statistics (as presented) - Number of banks37394144 - of which foreign controlled30323336 - Assets (percent of GDP)105.1109.5111.0117.5 - of which large banks60.563.264.467.3 - Client loans to deposits (percent)80.977.878.079.4 - of which large banks71.366.765.668.6 - Net interest income (percent of assets)2.492.512.522.53 Financial Soundness Indicators (percent) - Regulatory capital to risk-weighted assets11.614.015.315.3 - Return on equity20.726.419.718.7 - Liquid assets to total assets25.827.129.430.5 - Provisions to nonperforming loans57.449.747.949.4 - Nonperforming loans to total gross loans2.84.65.45.5 Notes on stress testing - The Czech banks have exposures to their parents equivalent to about half of their capital. Stress tests were run using an assumption of system-wide write-offs of 40 percent on these exposures. - The BIS statistics indicate that foreign banks have a small net creditor position vis-a-vis the Czech banks of about 3% of Czech banks’ balance sheet. However, this arises mainly from a limited geographic coverage. ### Structural issues and reform strategy - Accelerating structural reforms is critical for boosting potential growth. - Convergence of Czech per capita output towards Germany has stalled in recent years. - Key priority areas identified: cumbersome business regulations, problems with the education system and human capital, persistent rigidities in the labor market, technology and scientific infrastructure weaknesses, low quality of institutions and governance issues. - The government adopted a comprehensive reform strategy with the goal of making the Czech economy one of the 20 most competitive economies in the world by 2020. - The strategy outlines concrete plans for developing infrastructure, strengthening institutions and governance, reforming the education sector, further increasing labor market flexibility, and improving the business climate. Box 6 (Structural Reform Strategy) - The reform strategy adopted by the government in September 2011 calls for result-oriented reforms and empirical evaluation of government policies. - The strategy authors developed concrete proposals (“scorecards”) for more than 40 projects in the nine main areas (“pillars”) of the strategy: innovation, financial markets, labor markets, education, healthcare, macroeconomics, infrastructure, institutions, and enterprise and the market for goods and services. - The scorecards set time-tables and assign responsibilities for the key reform measures. Their implementation will be monitored by the inter-ministerial Competitiveness Council. - In late 2011, the government developed a new export strategy targeting diversification of products and markets. The new strategy aims to reduce the reliance on the core European markets, and limit concentration of exports in several key products and large firms. Twelve priority markets for exports have been selected: Brazil, China, India, Iraq, Kazakhstan, Mexico, Russia, Serbia, Turkey, Ukraine, the United States, and Vietnam. - The strategy calls for strengthening the export-financing institutions to support small and medium-sized exporters. - Implementation will be a challenge: many line ministries are involved and enhancing cooperation among the ministries and providing centralized monitoring would be pivotal. Coordination with the corporate sector and universities is viewed as critical. ### Staff appraisal and fiscal policy guidance - Significant progress has been made in tackling medium-term fiscal challenges. - Staff welcomes the authorities’ resolute implementation of the pension reform, including the retirement age increase and other parametric changes to the PAYG system, which was accompanied by raising the preferred VAT rate from 2012 as an intermediate step towards the unification of the two rates in 2013. - Continuation of pension, health, and tax reforms is important for securing long-term sustainability of the public sector. - Short-run fiscal policy needs to strike a balance between consolidation and avoiding an overly contractionary stance. - Staff believes that letting automatic stabilizers operate fully in 2012 to accommodate any cyclically driven revenue shortfalls is appropriate. - If the outlook worsens significantly, the planned fiscal consolidation could be replaced as well, particularly in 2013. - If the defined contribution component of the pension system (the second pillar) is introduced as planned in 2013 with associated revenue shortfalls for the budget, the unchanged nominal targets as defined by the EDP could imply an overly tight fiscal stance. - The government’s plan to introduce a fiscal rule is a welcome step for safeguarding long-term sustainability. - Given the current manageable level of public debt and sound institutional capacity in the Czech Republic, consideration could be given to a structural balance rule for the general government, augmented with a debt brake. - Such a rule would ensure fiscal sustainability while avoiding unwarranted procyclicality, and would be consistent with the new EU fiscal framework. - Any rule should have an appropriately wide coverage, provide clear guidance to the annual budgeting process, and be consistent with supranational rules. - An independent fiscal council would foster an effective implementation of the fiscal rule. *Source: _cr12115 - 15. Historically low rates remain (CZECH REPUBLIC 2012 ARTICLE IV REPORT, INTERNATIONAL MONETARY FUND).* ### 31. Monetary policy is appropriate, ### _cr12115 - 31. Monetary policy is appropriate, ### Monetary policy stance and assessment - Monetary policy is appropriate, although an easing bias could be considered. - Consistent implementation of the inflation targeting framework continues to serve the economy well, and inflation expectations remain well-anchored. - The policy rate at 0.75 percent for almost two years coupled with market expectations for a continuation of the low rates have provided needed support to the economy without excessive risk taking in any particular financial market segment. - Despite some upside risks arising from commodity prices, in view of the likely downside disinflationary effects and the fiscal policy constraints, there is a case for an easing bias. ### Strategies for the zero-bound constraint and unconventional tools - With the already low policy rate, it is important to have strategies for coping with the zero-bound constraint. - Given the limited room for conventional monetary policy, the use of unconventional tools may need to be contemplated for scenarios of significant undershoot of the inflation target. - Key criteria in deciding among the potential actions should include: - effectiveness against disinflationary pressures, and - the ease of reversing them. - Given the importance of the exchange rate channel for the economy, foreign exchange interventions may be considered in this regard, in particular, in case the exchange rate fails to fully respond to negative shocks. ### Financial system resilience and spillover risks - The Czech financial system has proved resilient to the effects of the global crisis, but spillover risks remain elevated. - Despite slow GDP growth at home and financial strains abroad, banks show: - strong capitalization, - solid profits, and - ample liquidity. - Resilience reflects a relatively conservative structure of bank balance sheets (particularly low loan-to-deposit ratios) and relatively low indebtedness of the corporate and household sectors. - Nevertheless, the financial system is facing a number of risks, particularly related to macroeconomic and financial developments in the euro area, where the parents of major Czech banks are based. ### Financial stability policy framework and supervisory actions - The authorities’ efforts to strengthen the financial stability policy framework are encouraging. - The CNB has already started to: - improve bank reporting requirements, - intensify monitoring of transactions between parents and subsidiaries, and - implement many of the FSAP recommendations. - Recommendation: It would be important to implement all FSAP recommendations, particularly in the areas of bank supervision and crisis management. ### Structural reforms to boost potential growth - Steady implementation of the structural reforms is critical to boost potential growth. - The government’s comprehensive reform strategy is a welcome first step for improving international competitiveness. - Reinvigorating the “Competition Council” is another important step in the right direction. - Implementation of these plans requires sustained efforts. *Source: _cr12115 - 31. Monetary policy is appropriate,* ### 36. It is recommended that the next ### 36. It is recommended that the next Article IV consultation with the Czech Republic be held on the usual 12-month cycle. The Czech Republic is an Article VIII country, and its data provision is adequate for surveillance (Informational Annex). ### Recommendation - It is recommended that the next Article IV consultation with the Czech Republic be held on the usual 12-month cycle. - The Czech Republic is an Article VIII country. - Its data provision is adequate for surveillance (Informational Annex). ### Macroeconomic developments (2007–12) - Activity recovered to close to its pre-crisis peak mainly thanks to net exports. - GDP and contribution patterns shown across quarters (2007 Q1–2011 Q3) emphasize: - Inventories, Net exports, Public consumption, Private consumption, Fixed capital formation contributions to GDP. - Selected time-series notes: - Czech exports and PMI export orders tracked Jan-07 to Jan-12. - Employment and vacancies plotted 2007 Q1–2011 Q3. - Unemployment rate (registered and ILO-definition) and Capacity Utilization shown across 2007 Q1–2011 Q3. - Key single-year and short-term statistics from Table 1 (selected): - Nominal GDP (USD billions): 180.5, 225.4, 196.2, 197.7, 215.3, 206.0, 213.6 (2007–2013, Staff Proj.) - Population (millions): 10.3, 10.4, 10.5, 10.5, 10.5, 10.6, 10.6 (2007–2013) - Real GDP (change in percent): 5.7, 3.1, -4.7, 2.7, 1.7, 0.1, 2.1 (2007–2013) - Unemployment rate (in percent): 5.3, 4.4, 6.7, 7.3, 6.7, 7.0, 7.4 (2007–2013) ### Inflation developments (2007–12) - Inflation increased very gradually in the post-2009 period; the spike in January 2012 is mostly due to VAT adjustments. - Consumer price inflation measures: - EU27 HICP Inflation and Czech Republic HICP Inflation (year-on-year percent change) tracked Jan-07–Jan-12. - Consumer price inflation excl. effects of indirect tax changes juxtaposed with headline CPI. - Commodity-driven fuel and food prices are significant inflationary drivers; adjusted inflation excluding fuels and food plotted alongside Food prices and Fuel prices. - Currency weakness could pose an inflationary risk if renewed (EUR/CZK and Import Price year-on-year percent change series shown). - Inflation expectations: - CPI, Inflation Expectations (12 month ahead), Inflation Expectations (36 month ahead), and Inflation target plotted (year-on-year percent change). - Real wages growth noted as very subdued: - Real wages in the business sector and total economy (year-on-year percent change) series displayed. ### External sector developments (2007–12) - Exports slowed significantly in H2 2011, with even weaker imports; trade surplus increased but was counterbalanced by higher profit transfers abroad. - The current account and financing: - Current Account net of reinvested earnings and net of FDI series show most of the current account deficit can be financed by retained earnings. - Capital inflows slowed in late 2011, led by portfolio flows; Financial Account components (Direct, Portfolio, Other Investment, Financial Derivatives) plotted 2007q1–2011q1. - Official reserves: - Official reserves comfortably cover short-term debt. - Official reserves compared (percent of short-term debt) across Czech Republic, Poland, Hungary, Turkey 2007q1–2011q1. - Net international investment position: - Net IIP and Net IIP excl. FDI remain positive; Assets and Liabilities series plotted. ### Financial markets (2007–12) - Exchange rates and risk: - The koruna has depreciated moderately against the euro in the last six months as risk aversion spiked. - Spot exchange rates CZK/US$ and CZK/Euro tracked 2007–2012. - Bond yields and expectations: - Bond yields increased slightly from historical lows; yield curves shown for dates 6/30/2008, 3/18/2009, 9/30/2011, 3/14/2012. - Policy rate and market expectations: Policy rate, 2-year bond yield, 10-year bond yield series plotted 2007–2012. - PRIBOR and FRA series: PRIBOR 3M, FRA 6x9, FRA 12x15 plotted 2007–2012. - Equities and housing: - Equities fell sharply; stock markets index (January 3, 2007=100) for Germany, USA, Czech Rep., Hungary shown. - Apartment prices (1999 Q1=100) show gradual retreat through 2011. ### Bank credit and financial intermediation (2005–12) - Credit growth: - Credit Growth by Selected Categories (Percent) shows Non-Financial Corporations and Households series Jan-06–Jan-12. - Private Sector Credit (Percent of GDP) for Germany, Czech Republic, Poland 2005–2011 indicates slow credit deepening. - Lending margins and ratios: - Lending Margins relative to demand deposit rate for Commercial loans and Consumer loans Jan-06–Jan-12. - Deposits and Loans to Private Sector (Billions of koruna) Jan-06–Jan-12. - Observations: - Credit growth was negatively affected by the crisis. - Pace of credit deepening has been very slow in recent years. - Little evidence of ongoing deleveraging in margins or loan-to-deposit ratio. ### Fiscal developments and prospects - Fiscal position and debt: - General government debt increased from a low level following fiscal deterioration in 2008–09 and is gradually unwinding. - Debt level projections (Unchanged Policies) show general government gross debt as percent of GDP rising across 2008–2017 against SGP ceiling. - Fiscal balances: - Fiscal Balance (Percent of potential GDP) overall balance and structural primary balance plotted 2003–2011. - Staff projections for Fiscal Balance (percent of GDP) show deficits projected to decline 2008–2017 with series for Overall, CAPB 1/, Government target, SGP floor. - Market indicators: - CDS Spreads for EU Countries (Basis points) Jan-10–Jan-12 show Czech Rep. relative position. - 10-Year Government Bond Yields (Percent) plotted for Slovakia, Poland, Germany, Czech Republic 2007–2012. ### Selected economic indicators (Table 1 highlights, 2007–13) - Real economy (change in percent): - Real GDP: 5.7, 3.1, -4.7, 2.7, 1.7, 0.1, 2.1 - Domestic demand: 6.6, 2.2, -5.9, 2.0, -1.0, -1.4, 1.4 - Private consumption: 4.2, 2.8, -0.4, 0.6, -0.5, -0.3, 1.2 - Investment: 15.5, 1.9, -20.8, 5.9, -1.6, -3.7, 2.7 - Exports: 11.2, 4.0, -10.0, 16.4, 11.0, -1.2, 6.0 - Imports: 12.8, 2.7, -11.6, 16.0, 7.5, -3.2, 5.7 - Prices and labor: - CPI (average): 2.9, 6.3, 1.0, 1.5, 1.9, 3.5, 1.9 - Unemployment rate (percent): 5.3, 4.4, 6.7, 7.3, 6.7, 7.0, 7.4 - Public finance (percent of GDP): - General government revenue: 40.3, 38.9, 39.1, 39.3, 40.7, 41.3, 41.2 - General government expenditure: 41.0, 41.1, 44.9, 44.1, 44.5, 44.9, 44.6 - Net lending / Overall balance: -0.7, -2.2, -5.8, -4.8, -3.8, -3.5, -3.4 - General government debt: 28.0, 28.7, 34.3, 37.6, 41.5, 43.9, 45.4 - External sector (percent of GDP): - Trade balance (goods and services): 2.9, 2.7, 4.3, 3.4, 4.2, 5.0, 5.2 - Current account balance: -4.4, -2.1, -2.5, -3.0, -2.9, -2.1, -1.9 - Gross international reserves (US$ billion): 34.9, 37.0, 41.6, 42.5, 40.3, 42.9, 44.9 - Reserves in months of imports: 3.5, 3.2, 4.5, 3.9, 3.2, 3.8, 3.9 - Reserves as percent of short-term debt (remaining maturity): 113.5, 100.1, 131.6, 132.6, 122.8, 133.5, 135.9 ### Balance of payments (Table 2, 2007–13, billions of US$) - Current account and components (2007–2013 series): - Current account balance: -7.9, -4.8, -4.8, -6.0, -6.3, -4.4, -4.0 (2007–2013 Est./Proj. shown top row) - Trade Balance: 2.2, 1.7, 4.6, 2.8, 5.3, 6.0, 6.5 - Exports: 106.5, 125.1, 99.1, 116.7, 138.5, 123.0, 127.2 - Imports: 104.3, 123.4, 94.6, 113.9, 133.2, 117.1, 120.7 - Factor Income (net): -12.7, -10.6, -13.2, -13.2, -15.6, -14.8, -15.3 - Financial account and financing: - Financial account: 6.4, 5.4, 7.8, 9.5, 5.1, 5.2, 4.7 - Direct investment, net: 9.0, 2.3, 2.0, 5.0, 4.2, 3.3, 2.7 - Portfolio investment, net: -2.7, 0.0, 8.6, 8.1, 0.4, 0.3, 0.3 - Other Investment and Financial derivatives, net: 0.1, 3.2, -2.7, -3.4, 0.7, 1.6, 1.8 - Memorandum items: - Current account, percent of GDP: -4.4, -2.1, -2.5, -3.0, -2.9, -2.1, -1.9 - Gross official reserves (US$ billion): 34.9, 37.0, 41.6, 42.5, 40.3, 42.9, 44.9 - Reserves in months of current year's imports: 3.5, 3.2, 4.5, 3.9, 3.2, 3.8, 3.9 - Reserves as ratio to short-term debt (remaining maturity): 114, 100, 132, 133, 123, 133, 136 - External debt, percent of GDP: 42.2, 37.4, 45.5, 48.3, 47.7, 48.7, 48.6 ### General government operations (Tables 3–4, 2007–14) - Statement of Operations of General Government (in billions of Koruny, 2007–14 Est./Proj. highlights): - Revenue series (2007–2014): 1,476.4, 1,498.6, 1,462.0, 1,484.5, 1,550.7, 1,612.4, 1,669.0, 1,749.3 - Taxes total (billions): 725.9, 714.4, 686.7, 688.6, 738.0, 779.6, 814.8, 857.3 - VAT: 226.8, 254.8, 254.0, 258.8, 271.9, 304.6, 314.0, 331.5 - Corporate Income tax: 171.1, 161.8, 132.3, 127.2, 130.9, 132.3, 145.6, 152.9 - Expenditure series (billions): 1,503.1, 1,583.5, 1,679.7, 1,665.2, 1,697.0, 1,750.9, 1,806.9, 1,884.2 - Net lending/borrowing (overall balance, billions): -26.7, -85.0, -217.7, -180.7, -146.3, -138.5, -137.9, -134.9 - General government debt (memorandum): 1,023.8, 1,104.9, 1,282.3, 1,417.7, 1,579.4, 1,714.1, 1,839.8, 1,966.2 - Primary balance (billions): 13.1, -45.5, -170.3, -129.5, -91.3, -77.3, -71.7, -63.6 - Statement of Operations in percent of GDP (2007–14): - Revenue (percent of GDP): 40.3, 38.9, 39.1, 39.3, 40.7, 41.3, 41.2, 41.1 - Expenditure (percent of GDP): 41.0, 41.1, 44.9, 44.1, 44.5, 44.9, 44.6, 44.3 - Net lending/borrowing (overall balance, percent of GDP): -0.7, -2.2, -5.8, -4.8, -3.8, -3.5, -3.4, -3.2 - General government debt (percent of GDP): 28.0, 28.7, 34.3, 37.6, 41.5, 43.9, 45.4, 46.2 - Primary balance (percent of GDP): 0.4, -1.2, -4.6, -3.4, -2.4, -2.0, -1.8, -1.5 ### General government financial balance sheet (Table 5, 2007–10, in billions of Koruny) - Net Financial Worth (selected years, in % of GDP in memorandum): - Net financial worth (in % of GDP): 11.2, 15.7, 6.7, 2.7, -2.0 (2007–2010) - Financial assets (in % of GDP): 43.8, 46.7, 41.1, 43.8, 37.5 - Liabilities (in % of GDP): 32.6, 31.0, 34.4, 41.1, 39.5 - o/w foreign liabilities (%): 28.4%, 28.4%, 29.4%, 30.3%, 33.8% - Major balance sheet levels (2007–2010, in billions): - Financial Assets (opening and changes across components such as Currency and deposits, Debt securities, Loans, Equity and investment fund shares, Other financial assets). - Liabilities (Debt securities, Loans, Other liabilities) and resulting Net financial worth series. ### Medium-term macroeconomic scenario (Table 6, 2007–17) - Key projections and baseline dynamics (select rows): - Real GDP (change, percent): 5.7, 3.1, -4.7, 2.7, 1.7, 0.1, 2.1, 3.3, 3.6, 3.6, 3.5 (2007–2017) - Private Consumption (percent change): 4.2, 2.8, -0.4, 0.6, -0.5, -0.3, 1.2, 3.5, 3.8, 3.8, 3.6 - Investment (percent change): 15.5, 1.9, -20.8, 5.9, -1.6, -3.7, 2.7, 3.6, 3.9, 3.9, 3.9 - CPI inflation (percent): 2.9, 6.3, 1.0, 1.5, 1.9, 3.5, 1.9, 2.0, 2.0, 2.0, 2.0 - Unemployment (percent of labor force): 5.3, 4.4, 6.7, 7.3, 6.7, 7.4, 6.9, 6.0, 5.5, 5.5, 5.5 - Output gap (percent of potential GDP): 3.1, 2.8, -3.6, -2.5, -1.9, -3.5, -3.2, -2.2, -1.2, -0.6, 0.0 - Public finances (percent of GDP): - Revenues: 40.3, 38.9, 39.1, 39.3, 40.7, 41.3, 41.2, 41.1, 41.1, 41.1, 41.1 - Expenditures: 41.0, 41.1, 44.9, 44.1, 44.5, 44.9, 44.6, 44.3, 44.0, 43.9, 43.9 - General government debt: 28.0, 28.7, 34.3, 37.6, 41.5, 43.9, 45.4, 46.2, 46.6, 46.9, 47.1 - Balance of payments: - Current account balance (percent of GDP): -4.4, -2.1, -2.5, -3.0, -2.9, -2.1, -1.9, -1.8, -1.8, -1.8, -1.8 ### Monetary indicators (Table 7, 2005–11, billions of koruny and rates) - Monetary aggregates and banking flows (selected levels): - M2, M1, Quasi Money series (absolute values for 2005–2011). - Net Domestic Assets, Net Domestic Credit to the Government Sector, Domestic Credits to the Rest of the Economy, Net Foreign Assets levels. - Central bank accounts and deposits: - Currency in Circulation and Net Foreign Assets levels 2005–2011. - Private sector deposits and their corporate/household breakdowns and foreign currency components. - Interest rates (percent): - Discount Rate: 1.0, 1.5, 2.5, 1.3, 0.3, 0.3, 0.3 (selected years) - Lombard Rate: 3.0, 3.5, 4.5, 3.3, 2.0, 1.8, 1.8 - Repo Rate - 2 Weeks: 2.0, 2.5, 3.5, 2.3, 1.0, 0.8, 0.8 - PRIBOR - 1 Week: 2.0, 2.5, 3.6, 2.8, 1.3, 0.8, 0.8 ### Financial soundness indicators (Table 8, 2008–11) - Capital and liquidity metrics (selected): - Regulatory capital to risk-weighted assets: 11.6, 14.0, 15.3, 15.4, 15.7, 15.3 (2008–Sep-11) - Regulatory Tier 1 capital to risk-weighted assets: 11.1, 12.6, 13.9, 13.8, 14.4, 14.2 - Capital to assets: 5.5, 6.1, 6.5, 6.5, 6.8, 6.5 - Profitability and margins: - Return on assets: 1.1, 1.5, 1.3, 1.6, 1.3, 1.2 - Return on equity: 20.7, 26.4, 19.7, 23.9, 19.8, 18.7 - Interest margin to gross income: 65.0, 55.8, 63.1, 62.5, 64.2, 64.3 - Liquidity and currency exposure: - Liquid assets to total assets: 25.8, 27.1, 29.4, 31.4, 31.4, 30.5 - Liquid assets to short-term liabilities: 70.3, 70.0, 71.1, 76.4, 75.9, 74.4 - Customer deposits to total (noninterbank) loans: 125.6, 128.2, 129.6, 129.6, 127.7, 127.1 - Foreign-currency-denominated loans to total loans: 21.8, 21.2, 21.6, 20.6, 20.2, 21.4 - Foreign-currency-denominated liabilities to total liabilities: 16.4, 14.2, 14.3, 14.8, 14.9, 15.4 - Asset quality: - Nonperforming loans to total gross loans: 2.8, 4.6, 5.4, 5.6, 5.6, 5.5 (2008–Sep-11) *International Monetary Fund. Czech Republic: 2012 Article IV Report (selected figures and charts as presented in the source content).* ### Annex I - Risk Assessment Matrix ### Annex I - Risk Assessment Matrix ### Risk Assessment Matrix — Shocks, Likelihood, and Expected Impact - Intensification of euro area crisis - Likelihood: Medium - Expected Impact: High - Key points: - Lower export demand from the euro area, the market for two thirds of all exports, will negatively affect growth in the Czech Republic. - Potential disruptive deleveraging, funneling capital and liquidity out from the Czech subsidiaries, and (at the extreme) outright failures can harm the Czech financial system severely. - The stock of portfolio capital is limited on account of small and less liquid asset markets, but rollovers of short-term debt of banks and corporates can become more difficult. - Gradual deleveraging by euro area banks - Likelihood: Medium - Expected Impact: Low - Key points: - Even without an intensification of the euro area crisis, euro area parent banks may reduce cross-border lending activities. - Czech subsidiaries are largely self-reliant in their funding and are profitable. Compared with other host countries, the impact on the Czech Republic should be smaller. - Rapid increases in commodity prices - Likelihood: Medium - Expected Impact: Low - Key points: - Well-anchored inflation expectations, the negative output gap, and labor market slack should help keep inflationary spikes from turning into sustained wage price spirals. - Sharp falls in property prices - Likelihood: Low - Expected Impact: High - Key points: - Property price declines subsided for the most part, but a renewed decline is still possible, though not very likely. - Unsold inventory continue to pressure prices, but mortgages are performing very well thanks to prudent LTV ratios and low interest rates. - The financial system has high exposure to the real estate market through mortgages as well as credit to developers. Widespread losses on these portfolios could lead to financial instability. - Safe-haven inflows to Czech assets - Likelihood: Low - Expected Impact: High - Key points: - The low indebtedness of the Czech Republic may make Czech assets look attractive to those seeking stability. However, the real economy is so tightly linked to the euro area that financial decoupling is an unlikely prospect. In addition, the local asset markets are quite small and not very liquid. - A sharp appreciation would hurt Czech exports, and, under current demand conditions, would lead to a severe disinflationary environment. *Czech Republic: Risk Assessment Matrix (excerpt)* --- ### Annex II - Debt Sustainability Analysis ### Public Sector Debt: Key Baseline Indicators and Projections (2007–2017) - Baseline: Public sector debt (in percent of GDP) - 2007: 28.0 - 2008: 28.7 - 2009: 34.3 - 2010: 37.6 - 2011: 41.5 - 2012: 43.9 - 2013: 45.4 - 2014: 46.2 - 2015: 46.6 - 2016: 46.9 - 2017: 47.1 - Debt-stabilizing primary balance - Listed as "-0.2" (presumably percent of GDP, table entry) - Change in public sector debt - 2007: -0.3 - 2008: 0.8 - 2009: 5.6 - 2010: 3.3 - 2011: 3.9 - 2012: 2.5 - 2013: 1.5 - 2014: 0.8 - 2015: 0.4 - 2016: 0.2 - 2017: 0.2 - Identified debt-creating flows (4+7+12) - 2007: -0.5 - 2008: 1.1 - 2009: 5.7 - 2010: 5.6 - 2011: 4.1 - 2012: 3.1 - 2013: 2.3 - 2014: 1.1 - 2015: 0.7 - 2016: 0.6 - 2017: 0.6 - Primary deficit (percent of GDP) - 2007: -0.4 - 2008: 1.2 - 2009: 4.6 - 2010: 3.4 - 2011: 2.4 - 2012: 2.0 - 2013: 1.8 - 2014: 1.5 - 2015: 1.2 - 2016: 1.1 - 2017: 1.0 - Revenue and grants (percent of GDP) - 2007: 40.3 - 2008: 38.9 - 2009: 39.1 - 2010: 39.3 - 2011: 40.7 - 2012: 41.3 - 2013–2017: 41.2 / 41.1 / 41.1 / 41.1 / 41.1 (respectively) - Primary (noninterest) expenditure (percent of GDP) - 2007: 40.0 - 2008: 40.1 - 2009: 43.7 - 2010: 42.8 - 2011: 43.1 - 2012: 43.3 - 2013: 43.0 - 2014: 42.6 - 2015: 42.3 - 2016: 42.2 - 2017: 42.1 - Automatic debt dynamics 2/ - 2007: -1.8 - 2008: -0.1 - 2009: 1.7 - 2010: 1.4 - 2011: 1.2 - 2012: 0.6 - 2013: 0.0 - 2014: -0.5 - 2015: -0.6 - 2016: -0.6 - 2017: -0.6 - Contribution from interest rate/growth differential 3/ - 2007: -1.3 - 2008: -0.3 - 2009: 2.1 - 2010: 1.0 - 2011: 1.1 - 2012: 0.6 - 2013: 0.0 - 2014: -0.5 - 2015: -0.6 - 2016: -0.6 - 2017: -0.6 - Of which contribution from real interest rate - 2007: 0.2 - 2008: 0.5 - 2009: 0.7 - 2010: 2.0 - 2011: 1.7 - 2012: 0.6 - 2013: 0.9 - 2014: 0.9 - 2015: 0.9 - 2016: 1.0 - 2017: 1.0 - Of which contribution from real GDP growth - 2007: -1.5 - 2008: -0.8 - 2009: 1.4 - 2010: -0.9 - 2011: -0.6 - 2012: 0.0 - 2013: -0.9 - 2014: -1.4 - 2015: -1.6 - 2016: -1.6 - 2017: -1.6 - Contribution from exchange rate depreciation 4/ - 2007: -0.5 - 2008: 0.2 - 2009: -0.4 - 2010: 0.4 - 2011: 0.1 - 2012–2017: (table shows "..." for later entries) - Other identified debt-creating flows - 2007: 1.7 - 2008: 0.0 - 2009: -0.6 - 2010: 0.8 - 2011: 0.5 - 2012: 0.5 - 2013: 0.5 - 2014: 0.1 - 2015: 0.1 - 2016: 0.2 - 2017: 0.2 - Privatization receipts (negative) - 2007: -0.3 - 2008: -0.6 - 2009–2017: 0.0 (each year) - Recognition of implicit or contingent liabilities - 2007: 0.2 - 2008: 0.2 - 2009: 0.2 - 2010: 0.3 - 2011–2017: 0.3 (each year) - Other (e.g., bank recapitalization) - 2007: 1.8 - 2008: 0.4 - 2009: -0.8 - 2010: 0.5 - 2011: 0.2 - 2012: 0.2 - 2013: 0.2 - 2014: -0.3 - 2015: -0.3 - 2016: -0.2 - 2017: -0.2 - Residual, including asset changes (2-3) 5/ - 2007: 0.1 - 2008: -0.3 - 2009: -0.1 - 2010: -2.4 - 2011: -0.2 - 2012: -0.6 - 2013: -0.8 - 2014: -0.3 - 2015: -0.3 - 2016: -0.4 - 2017: -0.4 - Public sector debt-to-revenue ratio 1/ - 2007: 69.3 - 2008: 73.7 - 2009: 87.7 - 2010: 95.5 - 2011: 101.9 - 2012: 106.3 - 2013: 110.2 - 2014: 112.4 - 2015: 113.5 - 2016: 114.0 - 2017: 114.4 - Gross financing need (right scale) - In percent of GDP: - 2007: 4.8 - 2008: 6.6 - 2009: 10.4 - 2010: 9.3 - 2011: 9.7 - 2012: 9.6 - 2013: 9.4 - 2014: 9.1 - 2015: 8.8 - 2016: 8.6 - 2017: 8.4 - In billions of U.S. dollars: - 2007: 8.7 - 2008: 14.8 - 2009: 20.3 - 2010: 18.4 - 2011: 20.9 - 2012: 19.7 - 2013: 20.1 - 2014: 20.2 - 2015: 20.2 - 2016: 20.5 - 2017: 20.6 - Scenarios highlighted: - Scenario with key variables at their historical averages 7/: 43.9 / 46.2 / 48.5 / 50.9 / 53.2 / 55.6 / 0.2 (table entries context-specific) - Scenario with no policy change (constant primary balance) in 2012-2017: 43.9 / 46.3 / 47.6 / 48.7 / 49.8 / 50.9 / -0.3 (table entries context-specific) ### Public Debt: Key Macroeconomic and Fiscal Assumptions (selected) - Real GDP growth (in percent) - 2007: 5.7 - 2008: 3.1 - 2009: -4.7 - 2010: 2.7 - 2011: 1.7 - 2012: 0.1 - 2013: 2.1 - 2014: 3.3 - 2015: 3.6 - 2016: 3.6 - 2017: 3.5 - Average nominal interest rate on public debt (in percent) 8/ - 2007: 4.2 - 2008: 3.9 - 2009: 4.3 - 2010: 4.0 - 2011: 3.9 - 2012: 3.9 - 2013: 3.9 - 2014: 3.9 - 2015: 3.9 - 2016: 3.9 - 2017: 4.0 - Average real interest rate (nominal rate minus change in GDP deflator, in percent) - 2007: 0.9 - 2008: 1.9 - 2009: 2.3 - 2010: 5.7 - 2011: 4.6 - 2012: 1.5 - 2013: 2.2 - 2014: 2.2 - 2015: 2.2 - 2016: 2.2 - 2017: 2.2 - Inflation rate (GDP deflator, in percent) - 2007: 3.3 - 2008: 1.9 - 2009: 1.9 - 2010: -1.7 - 2011: -0.7 - 2012: 2.3 - 2013: 1.7 - 2014: 1.6 - 2015: 1.7 - 2016: 1.7 - 2017: 1.7 - Growth of real primary spending (deflated by GDP deflator, in percent) - 2007: 3.3 - 2008: 3.5 - 2009: 3.7 - 2010: 0.6 - 2011: 2.5 - 2012: 0.6 - 2013: 1.3 - 2014: 2.5 - 2015: 2.8 - 2016: 3.4 - 2017: 3.4 - Primary deficit (repeated for clarity) - 2007: -0.4; 2008: 1.2; 2009: 4.6; 2010: 3.4; 2011: 2.4; 2012: 2.0; 2013: 1.8; 2014: 1.5; 2015: 1.2; 2016: 1.1; 2017: 1.0 --- ### External Debt Sustainability — Baseline Indicators and Projections (2007–2017) - Baseline: External debt (in percent of GDP) - 2007: 42.2 - 2008: 37.4 - 2009: 45.5 - 2010: 48.3 - 2011: 47.7 - 2012: 48.7 - 2013: 48.6 - 2014: 48.9 - 2015: 49.3 - 2016: 49.6 - 2017: 50.3 - Change in external debt - 2007: 3.6 - 2008: -4.9 - 2009: 8.1 - 2010: 2.8 - 2011: -0.5 - 2012: 1.0 - 2013: -0.1 - 2014: 0.3 - 2015: 0.4 - 2016: 0.3 - 2017: 0.7 - Identified external debt-creating flows (4+8+9) - 2007: -5.5 - 2008: -6.4 - 2009: 6.7 - 2010: 0.0 - 2011: -3.0 - 2012: 0.4 - 2013: -0.4 - 2014: -0.5 - 2015: -0.3 - 2016: -0.3 - 2017: -0.3 - Current account deficit, excluding interest payments (percent of GDP) - 2007: 3.0 - 2008: 0.8 - 2009: 1.6 - 2010: 2.2 - 2011: 2.2 - 2012: 1.1 - 2013: 0.4 - 2014: 0.0 - 2015: 0.1 - 2016: -0.2 - 2017: -0.3 - Deficit in balance of goods and services (percent of GDP) - 2007: -2.9 - 2008: -2.7 - 2009: -4.3 - 2010: -3.4 - 2011: -4.2 - 2012: -5.0 - 2013: -5.2 - 2014: -5.3 - 2015: -5.3 - 2016: -5.3 - 2017: -5.3 - Exports (percent of GDP) - 2007: 68.6 - 2008: 65.2 - 2009: 60.5 - 2010: 69.6 - 2011: 75.1 - 2012: 70.1 - 2013: 70.4 - 2014: 71.9 - 2015: 73.0 - 2016: 74.2 - 2017: 75.2 - Imports (percent of GDP) - 2007: 65.8 - 2008: 62.5 - 2009: 56.1 - 2010: 66.2 - 2011: 70.9 - 2012: 65.1 - 2013: 65.2 - 2014: 66.5 - 2015: 67.7 - 2016: 68.9 - 2017: 69.8 - Net non-debt creating capital inflows (negative) - 2007: -3.0 - 2008: -0.2 - 2009: -1.4 - 2010: -2.6 - 2011: -2.0 - 2012: -1.7 - 2013: -1.3 - 2014: -0.7 - 2015: -0.4 - 2016: -0.3 - 2017: -0.3 - Automatic debt dynamics 1/ - 2007: -5.5 - 2008: -7.1 - 2009: 6.4 - 2010: 0.5 - 2011: -3.2 - 2012: 1.0 - 2013: 0.5 - 2014: 0.2 - 2015: 0.0 - 2016: 0.3 - 2017: 0.3 - Contribution from nominal interest rate - 2007: 1.4 - 2008: 1.3 - 2009: 0.9 - 2010: 0.8 - 2011: 0.7 - 2012: 1.1 - 2013: 1.5 - 2014: 1.7 - 2015: 1.7 - 2016: 2.0 - 2017: 2.0 - Contribution from real GDP growth - 2007: -1.8 - 2008: -1.0 - 2009: 2.0 - 2010: -1.2 - 2011: -0.7 - 2012: -0.1 - 2013: -1.0 - 2014: -1.6 - 2015: -1.7 - 2016: -1.7 - 2017: -1.7 - Contribution from price and exchange rate changes 2/ - 2007: -5.0 - 2008: -7.4 - 2009: 3.6 - 2010: 0.9 - 2011: -3.2 - 2012–2017: (table shows "..." for later entries) - Residual, including change in gross foreign assets (2-3) 3/ - 2007: 9.1 - 2008: 1.6 - 2009: 1.5 - 2010: 2.7 - 2011: 2.5 - 2012: 0.6 - 2013: 0.3 - 2014: 0.8 - 2015: 0.7 - 2016: 0.6 - 2017: 1.0 - External debt-to-exports ratio (in percent) - 2007: 61.5 - 2008: 57.3 - 2009: 75.3 - 2010: 69.3 - 2011: 63.6 - 2012: 69.5 - 2013: 69.0 - 2014: 68.0 - 2015: 67.4 - 2016: 66.8 - 2017: 66.9 - Gross external financing need (in billions of US dollars) 4/ - 2007: 29.5 - 2008: 37.1 - 2009: 40.8 - 2010: 37.6 - 2011: 38.2 - 2012: 41.0 - 2013: 37.7 - 2014: 39.5 - 2015: 41.2 - 2016: 43.1 - 2017: 44.9 - Gross external financing need (in percent of GDP) - 2007: 16.3 - 2008: 16.4 - 2009: 20.8 - 2010: 19.0 - 2011: 17.8 - 2012: 19.9 - 2013: 17.6 - 2014: 17.9 - 2015: 18.0 - 2016: 18.1 - 2017: 18.3 ### External Debt: Key Macroeconomic Assumptions Underlying Baseline (selected) - Real GDP growth (in percent) - 2007: 5.7 - 2008: 3.1 - 2009: -4.7 - 2010: 2.7 - 2011: 1.7 - 2012: 0.1 - 2013: 2.1 - 2014: 3.3 - 2015: 3.6 - 2016: 3.6 - 2017: 3.5 - GDP deflator in US dollars (change in percent) - 2007: 15.0 - 2008: 21.2 - 2009: -8.7 - 2010: -1.9 - 2011: 7.1 - 2012: -4.4 - 2013: 1.6 - 2014: 0.2 - 2015: 0.2 - 2016: 0.2 - 2017: -0.8 - Nominal external interest rate (in percent) - 2007: 4.4 - 2008: 3.9 - 2009: 2.0 - 2010: 1.8 - 2011: 1.6 - 2012: 2.1 - 2013: 3.1 - 2014: 3.6 - 2015: 3.7 - 2016: 4.2 - 2017: 4.2 - Growth of exports (US dollar terms, in percent) - 2007: 24.2 - 2008: 18.6 - 2009: -19.3 - 2010: 16.0 - 2011: 17.5 - 2012: -10.7 - 2013: 4.2 - 2014: 5.6 - 2015: 5.5 - 2016: 5.5 - 2017: 4.1 - Growth of imports (US dollar terms, in percent) - 2007: 25.0 - 2008: 18.7 - 2009: -21.9 - 2010: 18.9 - 2011: 16.6 - 2012: -12.1 - 2013: 3.8 - 2014: 5.6 - 2015: 5.7 - 2016: 5.6 - 2017: 4.2 - Current account balance, excluding interest payments - 2007: -3.0 - 2008: -0.8 - 2009: -1.6 - 2010: -2.2 - 2011: -2.2 - 2012: -1.1 - 2013: -0.4 - 2014: 0.0 - 2015: -0.1 - 2016: 0.2 - 2017: 0.3 - Net non-debt creating capital inflows - 2007: 3.0 - 2008: 0.2 - 2009: 1.4 - 2010: 2.6 - 2011: 2.0 - 2012: 1.7 - 2013: 1.3 - 2014: 0.7 - 2015: 0.4 - 2016: 0.3 - 2017: 0.3 ### External Debt: Bound Tests and Scenarios (high-level) - Bound tests include shocks such as: - Nominal interest rate at historical average plus one standard deviation (B1). - Real GDP growth at historical average minus one standard deviation (B2). - Non-interest current account at historical average minus one standard deviation (B3). - Combination of B1–B3 using 1/2 standard deviation shocks (B4). - One-time 30 percent real depreciation (B5). - Example impacts shown in figures: - Combined shock raises external debt projections (figure box values): Combined shock baseline entries include values like 55 (context-specific figure labeling). - One-time 30 percent real depreciation in 2006 increases external debt projections substantially (e.g., 71.0 / 71.5 / 72.0 / 72.5 / 73.6 in the table's B5 rows). *Annex I and Annex II excerpts from the 2012 ARTICLE IV REPORT — CZECH REPUBLIC (selected tables and figures).* ### 1. Data provision is adequate for ### 1. Data provision is adequate for surveillance. ### Data dissemination and standards - The Czech Republic subscribed to the Special Data Dissemination Standard in April 1998. - Metadata and annual observance reports for 2006–9 are posted on the Fund’s Dissemination Standards Bulletin Board. ### Availability and timeliness of core surveillance variables - Exchange rates, and interest rates set by the Czech National Bank (CNB), are reported daily with no lag. - Gross and net international reserves: - reported monthly with a one-week lag; - also reported on a 10-day basis (with the CNB’s balance sheet) with a one-week lag. - Consumer prices, reserve money, broad money, borrowing and lending interest rates, central government fiscal accounts, and foreign trade: - reported monthly with a lag of between one and four weeks. - Final monetary survey data: available with a lag of about one month. - GDP and balance of payments data: made available on a quarterly basis with a lag of two to three months. - Since 2003, the main components of the balance of payments are also available monthly. - Annual Government Finance Statistics Yearbook data: - cover all operations of the general government, including the extrabudgetary funds excluded from the monthly data; - these annual data are available on a timely basis. - Monthly fiscal data published in International Financial Statistics (IFS): - cover state budget accounts and are available with a two- to three-month lag. - Reporting to STA is less current, especially for foreign trade and the national accounts. ### Data quality: general assessment and identified weaknesses - Overall assessment: Data quality is generally high, but some deficiencies remain in certain areas; authorities are taking measures to improve data accuracy. - National accounts data weaknesses: - Value added in the small-scale private sector is likely to be underestimated due to underdeveloped data collection mechanisms and a significant proportion of unrecorded activity stemming from tax evasion. - Discrepancies between GDP estimates based on the production method and the expenditure method are large and are subsumed under change in stocks. - Quarterly national accounts estimates are derived from quarterly enterprise reports and surveys; estimates are subject to bias because quarterly reporting is not mandatory and there is nonresponse and lumping of several expenditure categories in particular quarters by respondents. - Large swings in individual components of spending and the overall GDP from quarter to quarter bring into question the reliability of the quarterly data and hamper business cycle analysis. - External trade statistics: - Recent revisions to procedures for processing export data have brought statistics close to EU practice. - Continued weakness: unavailability of fixed base price indices for exports and imports; indices are currently presented on the basis of the same month of the previous year. - Monetary survey data: - Generally adequate for policy purposes. - Large variations in the interbank clearing account float, especially at the end of the year, require caution in interpreting monetary developments. - The CNB has made a major effort to identify the causes of these variations and adjust the data. - In 2002, the CNB implemented the European Central Bank’s (ECB) framework for collecting, compiling, and reporting monetary data to meet EU statistical conventions; data published in IFS are based on monetary accounts derived from the ECB’s framework. - The same set of accounts forms the basis for monetary statistics published in the CNB’s bulletins and on the website; presentation in IFS differs somewhat from the CNB’s. - Fiscal statistics: - Annual fiscal data on ESA-95 basis have been prepared by the Czech Statistical Office. - Quarterly data for non-financial accounts have been compiled and quarterly financial accounts are being prepared. - The Ministry of Finance uses the ESA-95 methodology for the Convergence Program targets. - ESA-95 differs from the national fiscal targeting methodology in institutional coverage (for example, the Czech Consolidation Agency is included in the central government under ESA definition) and inclusion of financial transactions and other accrual items (for example, called guarantees). - The Ministry of Finance participated in the Fund’s pilot project to transition to the statistical methodologies outlined in Government Finance Statistics Manual, 2001. ### Timeliness matrix (as of April 12, 2012) - Exchange Rates: Latest Observation Date 4/16/12; Date Received 4/17/12; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest Observation Date Mar. 2012; Date Received Apr. 2012; Frequency of Data D; Frequency of Reporting M; Frequency of Publication M. - Reserve/Base Money: Latest Observation Date Mar. 2012; Date Received Apr. 2012; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Broad Money: Latest Observation Date Mar. 2012; Date Received Apr. 2012; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Central Bank Balance Sheet: Latest Observation Date Mar. 2012; Date Received Apr. 2012; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consolidated Balance Sheet of the Banking System: Latest Observation Date Mar. 2012; Date Received Apr. 2012; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Interest Rates: Latest Observation Date 4/16/12; Date Received 4/17/11; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - Consumer Price Index: Latest Observation Date Mar. 2012; Date Received Apr. 2012; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Latest Observation Date 2010; Date Received Jun. 2011; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Latest Observation Date Feb. 2012; Date Received Apr. 2012; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Stocks of Central Government and Central Government-Guaranteed Debt: Latest Observation Date 2011 Q4; Date Received Mar. 2012; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - External Current Account Balance: Latest Observation Date Feb. 2012; Date Received Apr. 2012; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Exports and Imports of Goods and Services: Latest Observation Date Feb. 2012; Date Received Apr. 2012; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - GDP/GNP: Latest Observation Date 2011 Q4; Date Received Mar. 2012; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Gross External Debt: Latest Observation Date 2011 Q4; Date Received Mar. 2012; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - International Investment Position: Latest Observation Date 2011 Q4; Date Received Mar. 2012; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. ### Implications for surveillance and policy - Data provision supports regular surveillance, with many high-frequency indicators (daily, monthly, quarterly) available with minimal lags. - Areas requiring continued attention for improved surveillance: - Strengthening data collection for the small-scale private sector to reduce underestimation of value added. - Improving quarterly reporting response rates and reducing lumping in enterprise surveys to enhance quarterly GDP reliability and business cycle analysis. - Developing fixed base price indices for exports and imports. - Continued monitoring and adjustment for large variations in the interbank clearing account float. - Ongoing work to align fiscal reporting and to complete quarterly financial accounts under ESA-95 and GFS 2001 methodologies. *Source: 2012 Article IV Report — Informational Annex (Czech Republic).* ### 41.2 percent for 2011. ### _cr12115 - 41.2 percent for 2011. ### Statement by Executive Director and Senior Advisor - Statement by Willy Kiekens, Executive Director for Czech Republic and Miroslav Kollar, Senior Advisor to the Executive Director, May 4, 2012. - The Czech authorities thank the Article IV and the FSAP teams for constructive exchange of views during their missions. ### Economic development and outlook - Real GDP growth: - 2010: strong exports drove recovery. - 2011: real GDP growth reached 1.7 percent. - End-2011: economy entered a mild recession in line with euro area developments. - Authorities’ growth expectations: - 2012: growth in the order of 0 - 0.2 percent of GDP. - 2013: growth in the order of 1.3 - 1.9 percent; loss in absolute real GDP due to the crisis expected to be recovered in 2013. - Labor market: - Unemployment: 6.7 percent in 2011; may gradually rise to 7.2 percent in 2013. - Impact: rising unemployment will drag on household consumption. - External sector: - Current account deficit projected to shrink by 0.6 percent of GDP to about 2.3 percent in both 2012 and 2013. - Trade and services account: in surplus. - Income account: contributes to overall deficit mainly because of dividends on foreign direct investments paid to non-residents (of which 1/3 is reinvested in the Czech Republic). - Overall: current account deficit should remain at a sustainable level. - External positions and liabilities: - End-2011 net international investment position: -49 percent of GDP. - Foreign direct investment liabilities: accounted for 56 percent of total external liabilities. - External debt: 49.2 percent of GDP, equally divided between public and private debt. ### Monetary policy and exchange rate - Framework and actions: - Credible inflation-targeting monetary policy, flexible exchange rate, and integrated financial sector supervision within the CNB served well during the crisis. - The CNB did not have to rely on any unconventional monetary policy measures during this crisis period. - A macro-financial panel within the CNB integrates monetary policy analysis, supervision and macroprudential analysis ahead of each CNB Bank Board meeting. - Inflation and expectations: - Annual changes in monthly headline inflation increased from close to zero at end-2009 to 3.8 percent year-on-year in March 2012. - Monetary-policy-relevant inflation (inflation adjusted for first-round effects of changes to indirect taxes): 2.7 percent in March 2012. - Inflation target: 2 percent headline inflation with tolerance band of ± 1 percent; monetary-policy-relevant inflation is in the upper half of the tolerance band. - Main sources of inflation: administered prices (mostly natural gas), food prices (reflecting first-round effects of VAT hikes), fuel prices, and gradual pass-through of depreciated exchange rate. - Core inflation remains slightly negative. - Forecasts and policy stance: - Headline inflation expected to be just above 3 percent for most of 2012 owing to the VAT increase and to fall below the CNB target (i.e. below 2 percent) in 2013. - CNB forecast expects stability of market interest rates in the near future and a modest decline thereafter. - Exchange rate expected to appreciate gradually against the euro from its currently weakened level. - Reserves and coverage: - Foreign exchange reserves amount to 22 percent of GDP. - Reserves cover 43 percent of all external debt liabilities of domestic entities. - Reserves cover 23 percent of total banking sector assets. - Reserves cover 3.6 months of imports. ### Czech banking sector - Structure and funding: - Czech banks follow a traditional banking model; assets do not include substantial amounts of structured products. - Share of foreign-exchange denominated loans is very low. - Banks primarily funded from local deposits; sector operates in an environment of excess liquidity. - During the crisis, Czech banks (largely subsidiaries of euro area banks) served as net creditors to their parent banks in euro area. - Key ratios and indicators: - Loan-to-deposit ratio: 73 percent. - ROE: above 20 percent in recent years. - CAR: around 15 percent. - Share of non-performing loans in total loans: leveling up at 6.4 percent. - Provisioning: almost 60 percent of non-collateralized loans to households and corporations are provisioned. - Largest Czech banks substantially exceed the EBA 9 percent Tier 1 ratio recommendation. - No signs of loan deleveraging driven by recapitalization needs of euro area parent banks. - Stress test results: - FSAP stress tests (Nov-Dec 2011) highlighted resilience and profitability; even under a severe recession in Europe with losses on exposures to euro area parents, the sector as a whole would remain only slightly undercapitalized, potentially requiring only a small amount of fiscal resources, with recovery of small capital losses possible in as soon as two years. - CNB February 2012 stress tests: capitalization of entire sector would remain above the regulatory minimum of 8 percent even in a significantly adverse stress scenario combining negative domestic and external developments and renewed market uncertainty from escalation of the debt crisis in indebted euro area countries. - Institutional cooperation: - Since 2009, close cooperation between the CNB, the Ministry of Finance and the Deposit Insurance Fund. ### FSAP update - Authorities’ response: - Czech authorities welcome the positive assessment of the Czech regulatory and supervisory framework. - CNB appreciates recognition of resilience and stability of the Czech financial system and that compliance with the Basel Core Principles for Effective Banking Supervision has improved markedly since the previous assessment and integration of supervision of the whole financial sector into the CNB. - CNB values FSAP recommendations and works closely with the Ministry of Finance on follow-up. ### Fiscal policy - Consolidation timeline and targets: - Czech Republic started fiscal consolidation in 2010. - Fiscal deficit trajectory: - 2012: reach 3.0 percent of GDP. - 2013: 2.9 percent of GDP. - 2014: 1.9 (percent of GDP). - General government deficit expected below 3 percent of GDP by 2013 as required by EU EDP. - Budget expected to be balanced by 2016. - Public debt and medium-term objective: - Gross general government debt in 2011: 41.2 percent of GDP (among the lowest in the EU). - Medium-term budget objective under the Stability and Growth Pact: structural deficit not exceeding 1 percent of GDP; likely to be reached by 2016. - Recent outcomes and measures: - General government deficit improved and reached 3.1 percent of GDP in 2011. - 2011 measures primarily expenditure cuts: reduction in salaries of public sector employees (excluding teachers and doctors), reduction of selected social benefits and non-mandatory current expenditures. - For 2012, government intends to freeze budget expenditures by CZK 23.6 billion to reach a deficit of 3.0 percent of GDP. - Ministry of Education expenditures expected to be cut the least to protect education, science and R&D. - VAT adjustments since January 2012: reduced rate increased by 4 percentage points from 10 percent to 14 percent. - Staff recommendation vs. government stance: - Staff recommends allowing automatic stabilizers to operate and re‑pace planned fiscal consolidation if economic outlook worsens significantly. - Government prefers maintaining fiscal consolidation trajectory even in temporary unfavorable economic conditions. - Market reaction and ratings: - Market trust in consolidation reflected in low funding costs for public debt; government bond yields decoupling downwards from regional peers since beginning of 2011. - Standard & Poor’s upgraded Czech Republic in August 2011 by two notches to AA- (stable outlook). - April 11, 2012 package of measures to secure consolidation: - Expenditure measures include rationalization of public administration, cuts in renewable energy subsidies, temporary lowering of indexation of pensions for next three years. - Revenue measures include: - VAT hike by 1 percentage point for both rates to 21 percent and 15 percent for the next three years. - 1 percentage point increase in PIT for all income segments. - 7 percentage points additional PIT surcharge for high-income earners. - Tax hikes on tobacco. - Introduction of tax on non-sparkling wine and a carbon tax. - Cancellation of oil tax subsidy for agriculture producers. - 1 percentage point increase in tax on real estate transfers. - Inclusion of revenues of the state-owned forestry to the general budget. - Growth-smoothing measures: - Government intends to produce a package of growth-enhancing measures by mid May to smooth consolidation impact; potential elements include more effective drawing of EU funds, lowering administrative burden for businesses, promotion of exports, support for innovations and more effective use of state assets. - Institutional reform: - On April 11, 2012, government outlined plans for a constitutional fiscal responsibility act to be adopted by end of 2012 to: - Establish an independent fiscal council to assess fiscal impact of new legislation, conduct debt-sustainability analysis and monitor/evaluate governments’ fiscal goals. - Introduce a debt ceiling and a list of measures to be initiated when debt approaches the ceiling. - Introduce fiscal rules for all levels of government, including municipalities. - On April 25, 2012, government included consolidation path and institutional changes into its Convergence program for the period 2011-2015, submitted to the European Commission and the Council. ### Structural reforms - Pension reform: - New pension system based on three pillars. - Pay-as-you-go pillar remains core. - Second fully-funded defined-contribution pillar introduced, involving optional transfer (opt-out) of part of social contributions from the first pillar together with additional private contributions from net income to chosen private pension fund(s). - Investing in private funds optional but irreversible; workers can choose to continue full pension payments to the first pillar only. - Third pillar (additional contributions to private pension funds with state subsidy) remains almost unchanged. - Reform primarily aimed at people younger than 35; older people can voluntarily enter second pillar. - Estimated shortfall of revenues from social security contribution due to second pillar is included in Ministry of Finance fiscal outlook. - Pension reform planned to take effect in 2013. - Health care reform: - First phase increases patients' participation and introduces above-standard care; came into effect on 1 December 2011. - Second phase regulates rights and obligations of medical personnel and patients and stipulates conditions for emergency medical service; took effect on April 1, 2012. - Third phase will unify conditions for health insurance, improve competition among health insurance companies and improve effectiveness of health care providers; reform currently being prepared. - Social benefit reform: - Simplifies social security system, reduces administrative burdens for users, and improves targeting and needs calculation of social benefits; came into effect on 1 January 2012. ### Other - Export strategy: - In March 2012, government approved its 2020 export strategy to increase the share of non-EU markets (currently only less than 20 percent of total exports) and to improve the state's role as a partner for Czech exporters. *Statement by Willy Kiekens, Executive Director for Czech Republic and Miroslav Kollar, Senior Advisor to the Executive Director, May 4, 2012.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12115.pdf_