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Czechs Cut 2012, 2013 GDP Growth Outlook on Euro-Area Crisis

The Czech Finance Ministry cut its economic forecast for this year because of the effects of the euro area’s debt crisis and said the government will have to take measures to meet its budget-deficit target.

The Prague-based ministry lowered its 2012 gross domestic product growth forecast to 0.2 percent, compared with a previous estimate in November of 1 percent, it said in an e-mailed statement today. The outlook for 2013 growth was cut to 1.6 percent from 2 percent.

The ministry expects the public-finance deficit, the fiscal yardstick for assessing a European Union member’s readiness to adopt the euro, would account for as much as 3.8 percent of GDP this year if “measures” are not taken, compared with the target of 3.5 percent of GDP as set in the budget law.

“The new predictions are clouded by the marked downward risks because of the great uncertainty over the next developments in the eurozone,” according to the ministry statement. “Future developments in the Czech economy will depend in large part on how and how quickly the current situation in eurozone country’s with problems are solved.”

Prime Minister Petr Necas’s plan to trim the budget gap to less than the European Union limit of 3 percent of economic output by 2013 has helped shield Czech bonds from the euro area’s sovereign-debt crisis. Czech funding costs are the lowest in emerging Europe and the koruna outperformed Poland and Hungary last year, according to data compiled by Bloomberg.

Spending Cuts

The government may need to spending cuts of between 20 billion koruna ($1 billion) and 26 billion koruna, Finance Minister Miroslav Kalousek said in an interview after the forecasts were released.

The priority is to meet the deficit target even if the economy performs worse than currently expected, Kalousek said, adding the government won’t need to amend this year’s budget law and is able to cut its operational spending to meet the target if the economy develops in line with the latest forecast.

The premium investors demand for holding the Czech 10-year government bond over a similar German security was 129 basis points, or 1.29 percentage points as of 2:32 p.m. in Prague, compared with 375 points for Poland, the largest post-communist economy in the EU, data compiled by Bloomberg show. The spread for Slovakia, a euro-area member, was 271 basis points.

The cost of insuring against a Czech default is the second lowest in emerging Europe after euro-region member Estonia at 143 basis points, compared with 240 points for Poland, CMA’s data on credit-default swaps show.

‘Prudently Managed’

Standard & Poor’s on Aug. 24 raised the Czech Republic’s long-term foreign-currency debt two steps to AA-, the fourth-highest grade and on a par with Japan. The upgrade reflected a change in rating criteria that highlighted the Czech government’s low indebtedness and the “prudently managed and balanced economy,” S&P said.

The ministry said it sees average inflation at 3.2 percent this year and 1.5 percent in 2013. Government-sector debt in 2012 will probably rise to 43.1 percent of GDP from an estimated 40.7 percent last year.

“It’s not a result we should rejoice, but it doesn’t represent any disaster either,” Pavel Sobisek, a Prague-based analyst at UniCredit SpA, wrote in a report today. “Overall we regard the Finance Ministry’s forecast as realistic and adequately conservative.”

The economy will expand 2.7 percent and 3.6 percent in 2014 and 2015, respectively, according to the forecast.

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