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Czech Republic Country Risk Report Q2 2016

Czech Republic Country Risk Report Q2 2016

Core Views Economic growth in the Czech Republic will stay strong in the coming years and amount to 2.6% in 2016 and 2.4% in 2017. The largest contributor to GDP growth will continue be private consumption (1.4 percentage points in 2016). Strong wage growth will continue to underpin private consumption’s share of the economy. We are forecasting the budget deficit will stay under 2.0% of GDP in 2016 and 2017 and overall government debt will fall below 45.0% of GDP in the coming years. The Czech Republic’s trade surplus will swell to 8.0% of GDP in 2016 and the country’s current account will stay relatively balanced in the years ahead. Stronger inflation will return to the Czech Republic in 2016, for when we forecast price growth to accelerate to the central bank’s target of 2.0%. We expect the Czech National Bank to keep interest rates at 0.05% and leave the koruna cap of CZK27.00/EUR in place in 2016 and 2017. Changes To Forecasts We adjusted our GDP growth forecasts for the Czech Republic slightly downwards for 2016 and 2017, due to rising import receipts, as households are increasingly demanding higher value goods from abroad. We expect the economy to expand by 2.6% in 2016 (instead of 3.4%) and by 2.4% in 2017 (instead of 3.2%).


Executive Summary
Core Views
Changes To Forecasts
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Household Spending To Drive Growth
Due to a shortfall in public investment and uptake of EU structural funds, Czech GDP growth will slow in 2016 and 2017. However,
with the labour market tightening and wages set to surge, we see household consumption increasingly driving growth in the years
ahead.
GDP By Expenditure Outlook
TABLE: 10-YEAR GDP FORECAST
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal Policy And Public Debt Outlook
Public Finances To Stay Healthy
Due partially to solid economic and employment growth rates, the Czech Republic's public finances will stay healthy in 2016 and 2017.
Tax revenues will benefit from strong retail sales, while government borrowing costs will stay low amid record-low interest rates and the
country's safe haven status.
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
TABLE: FISCAL POLICY
External Trade And Investment Outlook
External Trade To Flourish
The Czech export machine will continue to benefit from low oil prices and an artificially cheap currency until 2017. With wages
increasingly catching up to western European levels, we expect import growth to be strong, keeping the Czech current account relatively
balanced in the years ahead.
Outlook On External Position
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE
TABLE: TOP 5 IMPORTS IN 2014
TABLE: TOP 5 EXPORTS IN 2014
Monetary Policy
Negative Interest Rates Unlikely
The Czech National Bank will not follow its European peers in lowering interest rates into negative territory. However, the koruna will
continue to be capped to the euro at CZK27.00/EUR until end-2017 to support the export sector, employment growth rates and inflation
outlook.
Monetary Policy Framework
Currency Forecast
CZK Cap To Stay, For Now
The Czech National Bank will keep its currency cap of CZK27.00/EUR and leave its policy rate at 0.05% in 2016. However,
with the CNB's inflation target in sight by end-2017, the koruna will return to a free-floating mechanism, leading to broad based
appreciation.
TABLE: BMI CURRENCY FORECAST
Chapter 2: 10-Year Forecast
The Czech Economy To 2025
To Catch Up With Western Peers
We forecast the Czech Republic to remain a positive convergence story through t he coming 10 years, despite a slow economy recovery
between 2012-2014, with the eurozone accession policy anchor contributing to steady progress in a long-term government reform
agenda, despite a target for accession yet to be decided.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Relations With the EU To Get Colder
Relations between the Czech Republic and the EU will worsen over the coming quarters. We expect the Czech government to continue
to oppose the EU's migrant reallocation system and re-introduce border controls in line with the other CE states.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Further Western Integration Ahead
The Czech Republic will remain the most developed CEE state over the next ten years, with per capita income set to catch up with
some EU-15 member states by the early 2020s. The country will face some key challenges, namely fiscal pressures from an ageing
population, relations between Czechs and immigrant minority groups, and potential ructions with Brussels. Nevertheless, the Czech
Republic will remain among the most politically, socially and economically stable countries in Europe through the next decade.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: IMPORT AND EXPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
TABLE: EMERGING EUROPE – TRADE PROCEDURES AND GOVERNANCE RISKS
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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