Emerging

An accumulation of shocks has hit growth

st  
Eco Emerging // 1 quarter 2021  
economic-research.bnpparibas.com  
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1
CZECH REPUBLIC  
AN ACCUMULATION OF SHOCKS HAS HIT GROWTH  
Economic growth experienced several short-lived boom-bust wild swings in 2020, amplified by trade openness and  
rd  
the severity of the second wave of Covid-19 in the fall. However, the recovery in the 3 quarter proved strong.  
Industrial production and exports both performed well, boosted by a stable exchange rate (and substantial foreign  
currency reserves). In addition, thanks to very modest debt levels, the government was able to offer rapid and  
substantial support to the economy.  
AMONG THE WORST SECOND WAVES  
FORECASTS  
The Czech Republic was one of the European countries hit earliest (the  
beginning of October) and hardest (75,000 active cases per million  
people) by the second wave of the Covid-19 pandemic. New lockdown  
measures were introduced, although these were less restrictive than in  
the spring of 2020 as industry continued to operate.  
2
019  
2020e  
2021e  
2022e  
Real GDP growth (%)  
2.4  
2.8  
-6.5  
3.2  
4.5  
2.5  
4.4  
2.4  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt / GDP (%)  
0.3  
-7.5  
40.0  
1.4  
-6.5  
42.0  
0.5  
-3.1  
41.5  
0.6  
After improving slightly, the infection curve worsened again at the turn  
of the year, prompting the continuation of restrictions on movement  
and access to public spaces (as evidenced by the latest closure of  
restaurants on 18 December, after they had been allowed to reopen  
on 3 December). A vaccination programme has been announced, with  
the aim of vaccinating front-line health staff and the over-80s by the  
end of March. Once this phase is completed, anyone else will be able  
to register for vaccination and priority will be warranted along with the  
risk profile of each person.  
30.2  
0.0  
Current account balance / GDP (%)  
External debt / GDP (%)  
77.3  
113.0  
10.3  
25.4  
78.3  
132.0  
11.4  
26.3  
68.5  
138.0  
11.0  
26.3  
64.4  
142.0  
10.9  
26.3  
Forex reserves (EUR bn)  
Forex reserves, in months of imports  
Exchange rate EURCZK (year end)  
e: ESTIMATE & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS ECONOMIC RESEARCH  
The Czech lockdown strategy is relatively flexible. It is designed to limit  
contact between individuals whilst allowing the economy to continue  
to operate. It has several alert levels, allowing regular adjustment of  
the severity of restrictions, which so far has helped limit the number of  
businesses closed. However, the scale of the current 3rd wave suggests  
MANUFACTURING PRODUCTION AND RETAIL SALES (LEVELS)  
that restrictions in the 1st quarter of this year will be tough.  
Manufacturing production  
Retail sales  
1
1
1
1
30  
20  
10  
00  
90  
FURTHER SHOCKS AHEAD IN 2021  
Industrial activity was therefore able to continue to grow in the 4th  
quarter, and the sector even saw its manufacturing PMI climb to 57  
in December 2020, its highest level since early 2018. The size of the  
automotive sector has been a fairly positive factor, as this sector saw  
both production and order books rise. This was a visible difference with  
the situation in the spring of 2020, when factories had to close their  
doors. Thus, manufacturing production in November 2020 was close to  
its pre-Covid level (up 3% in the case of the automotive sector).  
8
0
70  
Export growth was one of the engines of this performance: exports grew  
by 5% y/y in October and as much as 9.5% in November. Conversely,  
household consumption had to cope with stronger impacts from the  
resurgence of the Covid-19, with retail sales falling by 1.9% (month-on-  
month) in October and by 5.6% in November. As a result, consumption,  
which had regained its pre-Covid level in August, is now 8% lower,  
pointing to a very likely sizeable fall in GDP in the 4th quarter, under  
the effects of this resurgence.  
6
0
07  
08  
09  
10  
11  
12  
13  
14  
15  
16  
17  
18  
19  
20  
CHART 1  
SOURCE: CEIC  
Overall, the volatile pattern of growth in 2020 is likely to continue into  
021, although variations should be less extreme. This will delay the  
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Nonetheless, the Czech industry saw upward pressure on costs return to pre-Covid GDP levels to 2022, with growth over the whole  
increase at the end of the year, a phenomenon driven by delays created of 2021 expected to be 4.5% (after a 6.5% contraction in 2020). The  
by restrictions on transport, but also linked to high capacity utilisation prospect of a global shortage of semiconductors will weigh on the au-  
rates. This has come on top of an increase in unit labour costs that had tomotive industry in early 2021. Given the size of the sector, it should  
to be absorbed in the first half (9.5% y/y in the 2nd quarter), linked have an impact on overall GDP growth.  
to the closure of factories and the fact that partial unemployment  
compensation did not fully offset the loss of activity.  
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st  
Eco Emerging // 1 quarter 2021  
economic-research.bnpparibas.com  
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2
A SUBSTANTIAL LEEWAY TO EASE ECONOMIC POLICY  
FOREIGN CURRENCY RESERVES (EUR BN)  
The Czech Republic has one of the lowest levels of government debt in  
Europe, at 30.2% of GDP in 2019. In 2020, automatic stabilisers and the  
implementation of a stimulus package worth 5.5 points of GDP did not  
threaten this situation, with debt still well below the 60% limit (40%  
at end-2020).  
140  
1
20  
00  
80  
1
The stimulus package focused primarily on employment, through two  
mechanisms, one based on the payment of wages to workers exposed  
to partial unemployment (extended to the end of February 2021), the  
other (implemented in the 3rd quarter of 2020) on the suspension of  
payment of social security contributions by SMEs. Other measures  
were also introduced, including cuts in VAT on the most impacted  
sectors by Covid-19 and a mechanism for accelerated write-downs  
on investments made in 2020 and 2021, thus allowing a reduction in  
business tax bills. The European stimulus package is likely to help these  
efforts to support economic activity, with an expected initial payment  
of EUR 3.3 billion in grants (according to European Commission  
calculations). The government has issued 9 percentage points of GDP  
worth of potential guarantees on loans to the private sector in 2020 (a  
programme to be continued in 2021), whilst the period for which this  
guarantee will remain in force has been extended to April 2026.  
6
0
0
4
20  
0
0
7
08  
09  
10  
11  
12  
13  
14  
15  
16  
17  
18  
19  
20  
21  
CHART 2  
SOURCE: REFINITIV  
the central bank has observed that the households that made use of the  
moratorium were those with the highest debt and interest expenditure  
Given the relatively low level of government debt, the central bank to income ratios. The expected increase in credit risk has resulted in a  
did not have to buy sovereign bonds, as there was no pressure on rise in provisions and a fall in profitability (in ROA terms) from 1.2% at  
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yields. The 10-year yield remained roughly around 1.25% in early 2021, end-2019 to 0.6% in the 3 quarter of 2020.  
slightly below the pre-Covid level. Monetary stimulus has therefore  
been concentrated on conventional measures, with cuts in the policy  
rate in the spring of 2020 (from 2.25% to 0.25%). The other pillar of  
the central bank’s strategy has been to ease macroprudential ratios  
in a bid to support lending (increase in the loan to value ratio and a  
suspension of the debt to income ratio for households).  
At the same time, banks’ capital has grown further, with a CET1 ratio  
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of 20.7% in the 3 quarter of 2020, demonstrating ample resources to  
deal with any shock.  
Completed on 11 January 2021  
Indicators of debt (government and external) and liquidity (foreign cur-  
rency reserves) have remained at comfortable levels despite last year’s  
health crisis, which has helped limit financial tensions. The increase  
of the current account surplus and continued net capital inflows thus  
helped support foreign currency reserves. The decrease in the external  
debt ratio, interrupted in 2020 by the fall in nominal GDP, is likely to  
resume in 2021. All of this argues for a quite stable exchange rate for  
the koruna against the euro.  
Stéphane COLLIAC  
stephane.colliac@bnpparibas.com  
BANKS ARE WELL CAPITALISED RELATIVELY TO THE FORE-  
SEEABLE INCREASE IN CREDIT RISK  
Growth in banking sector lending to households held steady in 2020 at  
a rate of 6%, close to the 2019 level, whilst growth in lending to com-  
panies slowed to 3% (with relative stagnation from May).  
The Czech authorities gave a 6-month moratorium on repayments on  
loans to the private sector (this expired in October 2020). In the end,  
this affected 16% of loans to non-financial companies, and 15% of loans  
to households. The authorities have not so far adopted a new morato-  
rium, given the scale of those already granted in 2020.  
Banks estimate that a share of the loans that benefited from this  
moratorium will become non-performing loans over the coming  
months, with an impact of 2 points on the non-performing loan ratio,  
which stood at 2.7% of total loans at end-September 2020. The greatest  
risk is related to non-financial companies, for which the central bank  
expects a non-performing loan ratio of 8.7% by end-2021. In addition,  
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