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OECD, Seminar “20 Years After” Paris, 20 November 2009. The Czech Republic: Future challenges and possible risks. Miroslav Singer Vice-Governor, Czech National Bank. M. Singer – Present Conditions, Monetary Policy and Outlook in Czech Republic 1. - PowerPoint PPT Presentation
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M. Singer – Czech Republic: Future challenges and opportunities 1M. Singer – Present Conditions, Monetary Policy and Outlook in Czech Republic 1M. Singer - Czech Republic: Staying Ahead of the Curve with Regard to Monetary Policy 1M. Singer: The economic and financial crisis from the point of view of the Czech banks 1M. Singer: Financial Crisis: Impacts on the CR and Lessons for the Supervisors 1M. Singer: Financial Crisis: Likely Impacts on the CR and Lessons for the SupervisorsM. Singer: Present Conditions, Monetary Policy and Outlook for CR 1M. Singer: Consumer protection in financial services: CNB approach 1
The Czech Republic: The Czech Republic: Future challenges and Future challenges and
possible risks possible risks
OECD, Seminar “20 Years After”Paris, 20 November 2009
Miroslav SingerMiroslav Singer Vice-Governor, Czech National BankVice-Governor, Czech National Bank
M. Singer – Czech Republic: Future challenges and opportunities 2
• Economic performance of Czech economy during crisis
• CNB forecast • Challenges and possible risks
ContentsContents
M. Singer – Czech Republic: Future challenges and opportunities 3
GDP growth: q-o-qGDP growth: q-o-q
Technically, the recession stopped in 2009 Q2
Source: CZSO
0,9
1,61,2
0,50,1
0,71,0
0,00,50,5
0,1
1,11,21,2
0,3
1,3
0,7
1,41,51,2
1,81,71,61,81,71,9
1,61,4
2,5
0,2
1,51,0
0,1
1,2
0,5
-1,3
-4,8
0,1
-6
-5
-4
-3
-2
-1
0
1
2
3
00/I III 01/I III 02/I III 03/I III 04/I III 05/I III 06/I III 07/I III 08/I III 09/I III
q-o-
q ch
ange
in %
M. Singer – Czech Republic: Future challenges and opportunities 4
Cumulative GDP q-o-q growth:Cumulative GDP q-o-q growth: 3Q2008-2Q2009 (not seasonally adjusted) 3Q2008-2Q2009 (not seasonally adjusted)
The cumulative q-o-q GDP decline in the Czech Republic was comparable with the EU-27 average
Source: Eurostat, own computation
7,4
2,7
1,40,4
-0,9
-2,7 -3,1 -3,6 -3,6 -3,8 -3,9-4,9 -5,2 -5,3 -5,3 -5,4 -5,9 -5,9 -6 -6,1
-7,1 -7,3 -7,5
-8,9 -9
-15,2 -15,7
-18,6-20
-15
-10
-5
0
5
10
R PL BG GR CYP MAL F B SK PT E AT NL CZ L EU-27
H UK S I D DK IRL SLO SF LAT EST LIT
M. Singer – Czech Republic: Future challenges and opportunities 5
ManufacturingManufacturing
Source: CZSO
The decline in manufacturing output seems to have bottomed out in mid-2009
-30
-20
-10
0
10
20
30I.0
7
II.07
III.0
7
IV.0
7
V.0
7
VI.
07
VII
.07
VII
I.07
IX.0
7
X.0
7
XI.
07
XII
.07
I.08
II.08
III.0
8
IV.0
8
V.0
8
VI.
08
VII
.08
VII
I.08
IX.0
8
X.0
8
XI.
08
XII
.08
I.09
II.09
III.0
9
IV.0
9
V.0
9
VI.
09
VII
.09
VII
I.09
IX.0
9
y-o
-y in
%
M. Singer – Czech Republic: Future challenges and opportunities 6
Exports, imports and trade balanceExports, imports and trade balance(annual percentage changes; percentage points; constant
prices; seasonally adjusted data)
Source: CZSO
The decline in total foreign trade turnover was still marked in 2009 Q2
-20
-15
-10
-5
0
5
10
15
20
I/06 II III IV I/07 II III IV I/08 II III IV I/09 II
Exports of goods and servicesImports of goods and servicesDifference betw een export grow th and import grow th (in p.p.)
M. Singer – Czech Republic: Future challenges and opportunities 7
Inflation Inflation (y-o-y in %)(y-o-y in %)
Annual inflation fell towards zero in 2009 Q3
Source: CZSO
-1
0
1
2
3
4
5
6
7
8
1/07 4 7 10 1/08 4 7 10 1/09 4 7
Consumer price inflationMonetary-policy relevant inf lation
M. Singer – Czech Republic: Future challenges and opportunities 8
CZK/EUR CZK/EUR (1 Jan 2007-17 Nov 2009)(1 Jan 2007-17 Nov 2009)
After appreciating in July 2008 and depreciating in February 2009, the koruna has returned to its previous trend
Source: Eurostat
22
23
24
25
26
27
28
29
30
2007
m01
d02
2007
m01
d23
2007
m02
d13
2007
m03
d06
2007
m03
d27
2007
m04
d19
2007
m05
d11
2007
m06
d01
2007
m06
d22
2007
m07
d13
2007
m08
d03
2007
m08
d24
2007
m09
d14
2007
m10
d05
2007
m10
d26
2007
m11
d16
2007
m12
d07
2007
m12
d28
2008
m01
d21
2008
m02
d11
2008
m03
d03
2008
m03
d24
2008
m04
d14
2008
m05
d06
2008
m05
d27
2008
m06
d17
2008
m07
d08
2008
m07
d29
2008
m08
d19
2008
m09
d09
2008
m09
d30
2008
m10
d21
2008
m11
d11
2008
m12
d02
2008
m12
d23
2009
m01
d14
2009
m02
d04
2009
m02
d25
2009
m03
d18
2009
m04
d08
2009
m04
d29
2009
m05
d21
2009
m06
d11
2009
m07
d02
2009
m07
d23
2009
m08
d13
2009
m09
d03
2009
m09
d24
2009
m10
d15
2009
m11
d05
M. Singer – Czech Republic: Future challenges and opportunities 9
CNB’s key ratesCNB’s key rates
Source: CNB
To deal with the strong disinflationary pressures, the CNB has lowered its interest rates to a record low
0
1
2
3
4
5
9/08 10 11 12 1/09 2 3 4 5 6 7 8 9 10
Lombard rate 2W repo rate Discount rate
M. Singer – Czech Republic: Future challenges and opportunities 10
State budget balanceState budget balance
The economic crisis and earlier fiscal measures are reflected in a deteriorating state budget balance (vs. surpluses in 2007 and 2008)
Source: Ministry of Finance
-17,0-26,0
1,3
19,7 22,2
36,327,2
12,8
9,7
-28,1
-38,3
-5,7
9,3 5,310,5 10,9
-6,5
-20,0
-55,7
-71,4 -68,3-76,2
-89,6 -87,3
-138,1
-66,4
-160
-140
-120
-100
-80
-60
-40
-20
0
20
40
60
1 2 3 4 5 6 7 8 9 10 11 12
bn C
ZK
2007 2008 2009
Note: GFS 1986
M. Singer – Czech Republic: Future challenges and opportunities 11
Loans to non-financial corporations Loans to non-financial corporations and households and households (y-o-y change in %)(y-o-y change in %)
Loans to non-financial corporations declined year on year for the first time since 2005
Source: CNB
-10
0
10
20
30
40
1/05 1/06 1/07 1/08 1/09
Loans, total Loans to non-financial corporationsLoans to households
M. Singer – Czech Republic: Future challenges and opportunities 12
Newly extended loansNewly extended loans (y-o-y change in %)(y-o-y change in %)
Source: CNB
-20
-10
0
10
20
30
40
50
1/05 1/06 1/07 1/08 1/09
Loans, total Loans to non-financial corporationsLoans to households
New loans to non-financial corporations and households decreased
M. Singer – Czech Republic: Future challenges and opportunities 13
Non-performing loansNon-performing loans (% of total loans in segment)(% of total loans in segment)
Source: CNB
Non-performing loan ratios rose most significantly in non-financial corporations
0
2
4
6
8
10
1/06 1/07 1/08 1/09
Non-financial corporationsLending to individuals for house purchaseConsumer credit to individualsLoans to individualsTotal loans
M. Singer – Czech Republic: Future challenges and opportunities 14
SummarySummary• Financial and economic crisis was imported into Czech Republic• Czech economy was slightly overheated before crisis, but generally at
macroeconomic equilibrium (low inflation, anchored expectations)• Monetary-policy and macroeconomic framework (inflation targeting
and managed float) provided economy with necessary adjustment mechanisms own currency proved to be advantage in crisis
• Main cause of vulnerability of economy: high export dependence• Domestic banking sector was in good condition before crisis: banks
were well capitalised and profitable (negligible share of toxic assets)• Financial sector did not amplify impacts of crisis on economy and will
not be source of major risks going forward• Stress tests: strong resilience, profitability, sufficient capital adequacy
The Czech economy is currently coping with the crisis better than many other advanced European countries
M. Singer – Czech Republic: Future challenges and opportunities 15
CNB ForecastCNB Forecast(November 2009)(November 2009)
M. Singer – Czech Republic: Future challenges and opportunities 16
GDP growth forecastGDP growth forecast (annual percentage changes; seasonally adjusted)
Source: CNB
After a decline in economic activity this year a moderate recovery will take place in late 2009 and early 2010
-8
-6
-4
-2
0
2
4
6
8
IV/07 I/08 II III IV I/09 II III IV I/10 II III IV I/11 II
90% 70% 50% 30% confidence interval
M. Singer – Czech Republic: Future challenges and opportunities 17
Headline inflation forecastHeadline inflation forecast (annual percentage changes)
Source: CNB
At the monetary policy horizon, the headline inflation forecast is slightly above the inflation target
-2
0
2
4
6
8
IV/07 I/08 II III IV I/09 II III IV I/10 II III IV I/11 II
90% 70% 50% 30% confidence interval
Inf lation target
Monetary policy
horizon
M. Singer – Czech Republic: Future challenges and opportunities 18
Main uncertainties in short runMain uncertainties in short run
• What will course and intensity of recovery look like internationally and in Czech Republic’s major trading partners? W-shaped?
• How strong are disinflation pressures (external inflation, nominal wages, domestic demand)?
• How will Czech public finances develop in 2010 and 2011? • How will koruna exchange rate develop? • How effective is monetary policy transmission mechanism?
Huge uncertainty still surrounds economic developments and monetary policy-making going forward
M. Singer – Czech Republic: Future challenges and opportunities 19
Challenges and possible risksChallenges and possible risks
• Domestic: Fiscal policy • External:
Protracted and painful recovery in Europe Hasty supervision and regulation changes
M. Singer – Czech Republic: Future challenges and opportunities 20
• High share of mandatory or quasi-mandatory expenditures in total expenditures (above 70%)
• No pension reform or healthcare reform (ageing!)• Lack of transparency in budgetary process • Atomisation of public budgets • Lack of audit of state funds
Despite significant steps approved recently by parliament, the fiscal area represents the most serious macroeconomic risk going forward (persisting deficits even in good times and rapid growth in debt)
Long-neglected Long-neglected fisfiscal problemscal problems
M. Singer – Czech Republic: Future challenges and opportunities 21
Public finance deficitsPublic finance deficits
Source: CNB computation, November 2009 forecast
Public finance deficits will fluctuate between 5% and 6% of GDP over the next few years
-2,9%
-3,6%
-2,6%
-0,7%
-2,0%
-6,0%
-4,9%
-5,6% -5,5%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
2004 2005 2006 2007 2008 2009 2010 2011 2012
As
% o
f G
DP
Note: ESA 95
M. Singer – Czech Republic: Future challenges and opportunities 22
Public debtPublic debt (as % of GDP)(as % of GDP)
After a period of stability public debt is expected to grow rapidly after 2008
Source: CNB computation, November forecast
24,9
28,229,8 30,1 29,7 29,4 29 30
35,7
39,2
43,2
0
5
10
15
20
25
30
35
40
45
50
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
As
% o
f G
DP
M. Singer – Czech Republic: Future challenges and opportunities 23
GDP GDP (2000 = 100)(2000 = 100)
The longer term danger for Europe is still its too sluggish growth
Source: Eurostat
95
100
105
110
115
120
125
130
135
140
145
2000
q01
2000
q03
2001
q01
2001
q03
2002
q01
2002
q03
2003
q01
2003
q03
2004
q01
2004
q03
2005
q01
2005
q03
2006
q01
2006
q03
2007
q01
2007
q03
2008
q01
2008
q03
2009
q01
2009
q03
200
0 =
100
CR EU-27 USA
M. Singer – Czech Republic: Future challenges and opportunities 24
Current problems in financial market Current problems in financial market supervisionsupervision
• Planned European Systemic Risk Board at ECB and European financial supervision system may blur division of labour among existing supervisory authorities
• Instead of precisely defining and identifying causes of crisis, illusion being created that more supranational supervision and regulation is guarantee against future repetition of crisis
• Risk: if supervision is distanced from national level, current unsatisfactory state of affairs will deteriorate even further
• Other topical issues put on back burner (cost-sharing)• Overregulation of the sector may further decrease the EU‘s
growth potential.The past problems of Czech banks impacted “fairly” on Czech taxpayers, but in the future external problems might impact on them through no fault of their own!
M. Singer – Czech Republic: Future challenges and opportunities 25
Five violated principles – what the Five violated principles – what the current plans neglect/worsencurrent plans neglect/worsen
1. Uncertainty is fundamental (diversifying supervisory/regulatory policies reduces risks arising from fundamental uncertainty)
2. Positive motivation (eliminated value of banking licences for shareholders and profitability of traditional areas of banking)
3. Unpredictable response (regulated/supervised entities always react [rather] differently than reformers intend)
4. Communication of costs (costs often not even discussed at expert level, never mind communicated by politicians to voters)
5. Manageable number of institutions (any unification, or even just improvement of coordination, of supervisory/regulatory institutions at European level requires progress with integration of 80 or so institutions at national level)
M. Singer – Czech Republic: Future challenges and opportunities 26
ConclusionsConclusions• Risk of long-term fiscal “inaction” (structural deficit)
currently being compounded by economic decline (cyclical deficit) and potentially by political stalemate in future
• Due to high export intensity of the Czech economy a sluggish recovery in Europe will impose an impediment on domestic recovery
• Hasty changes in financial market regulation and supervision may present future risks to financial stability of Czech economy (any mistakes in globalised supervision could be far-reaching and could even trigger new crisis) or to the growth in Europe.
While the fiscal risk is domestic (and therefore influenceable), the risks of pan-European supervision are external (and therefore hard to influence)
M. Singer – Czech Republic: Future challenges and opportunities 27
Thank youThank you
Miroslav [email protected]: +421 224 412 008
Česká národní banka Na příkopě 28 115 03 Praha 1