Shunning Euro Pays Off for Czechs Favoring Koruna: CurrenciesKrystof Chamonikolas and Peter Laca
After shunning euro membership for a decade, the Czech Republic is now reaping the benefits of the common currency without its pitfalls.
Exporters from coal miner New World Resources Plc to oven maker J 4 say Czech measures to weaken the koruna will boost their earnings and give the currency the sort of stability enjoyed by euro members. Policy makers intervened in foreign-exchange markets on Nov. 7 for the first time in 11 years, sending the koruna tumbling a record 4.4 percent versus the euro and a measure of expected price swings to an all-time low.
While other former-communist states including Slovenia, Slovakia and Estonia joined the euro over the past decade, the Czech Republic has kept its own currency, allowing it to devalue to boost growth. The nation’s economy will grow 1.8 percent next year compared with 1 percent for the euro area, according to economists surveyed by Bloomberg.
“The intervention is a perfect example of why Czechs are right to reject the euro,” Peter Attard Montalto, an economist at Nomura Holdings Inc., said in a phone interview from London on Nov. 22. “Keeping their own currency gives them a greater toolbox to tackle or avoid economic crises. Troubled euro-zone members have zero maneuvering space in monetary policy.”
The koruna fell to 26.99 per euro, the weakest level since 2009, on the day the Czech National Bank first sold koruna in the foreign-exchange market. It kept depreciating as the central bank continued selling, and traded at 27.33 as of 12:06 p.m. in New York. The koruna is this month’s worst performer versus the euro among 31 major currencies tracked by Bloomberg, sliding 5.6 percent, on pace for its biggest monthly decline on record.
“A weaker koruna is a net positive for New World Resources,” Petr Jonak, a Prague-based spokesman for the biggest Czech coking-coal producer, said by e-mail on Nov. 18. “Lower exchange-rate volatility is supportive for our business and for financial planning.”
New World sells more than half of its output to Austria, Slovakia, Poland and Germany, supplying coal to steelmaker ArcelorMittal and industrial component-manufacturer Thyssenkrupp AG, according to its website.
The Czech central bank stepped in to boost the chances of an export-led recovery after gross domestic product shrank for six straight quarters through March and the prospect of deflation loomed. Growth suffered as the government’s three-year austerity program curbed domestic spending and the euro-area crisis damped demand for the nation’s exports, which account for about 80 percent of GDP and include cars and electronics.
Had the CNB not intervened, the nation would have faced at least three quarters of deflation in 2014 that could have sent it back into recession, Deputy Governor Vladimir Tomsik said at a conference in Prague Nov. 20. Czech consumer prices increased 0.9 percent over the past 12 months, below the 1 percent-to-3 percent target range for the first time since March 2010.
The CNB’s cap of about 27 koruna per euro, which it pledged to defend “for as long as needed,” echoes the 1.2-per-euro ceiling Switzerland imposed on the franc in 2011. Other European nations have gone further, with Denmark, Bulgaria, Latvia and Lithuania pegging their currencies directly to the euro. Latvia is scheduled to replace its lat with the shared currency Jan. 1.
Capping the koruna’s gains versus the euro isn’t the same as adopting the common currency, Tomsik said.
“We haven’t abandoned our autonomous monetary policy, we haven’t changed the foreign-exchange regime,” he said by phone on Nov. 21.
The koruna’s three-month implied volatility versus the euro almost halved after the CNB started selling the currency, tumbling to a record 3.3 percent on Nov. 13, from 5.9 percent a week earlier, according to data compiled by Bloomberg. Price swings rose to as high as 10.8 percent in January 2012. The euro is the least-volatile major European currency after the British pound, data compiled by Bloomberg show.
“Our competitiveness has significantly improved thanks to the intervention,” Josef Mazl, co-owner of J 4, which exports ovens to bakers and confectioners, said in a Nov. 20 interview in Prague. “This may help us win contracts we otherwise wouldn’t get, and we won’t have to cut jobs now.”
Foreign-trade surpluses and investment inflows from overseas stoked gains in the koruna in the years following the euro’s creation in 1999. The Czech currency appreciated versus the shared currency in 10 of the 14 years through December 2012, climbing 30 percent, data compiled by Bloomberg show.
The CNB said Nov. 25 it has spent about 200 billion koruna ($9.9 billion) to purchase foreign currency this month. That’s equivalent to about 5 percent of Czech GDP and exceeds the $3.5 billion that Israel’s central bank plans to buy next year to curb the shekel’s gains. The koruna slid as much as 1 percent on Nov. 19 after board member Lubomir Lizal said the central bank may be forced to push the koruna ceiling even lower.
The Czech Republic was created in the split of Czechoslovakia in 1993, after it abandoned communism in 1989. The country joined the European Union in 2004 and, like other newcomers, is obliged to adopt the euro under its accession treaty, though no deadline has been set for the switch.
The euro-region debt crisis has reinforced opposition to dropping the koruna, according to a survey by a unit of the state-funded Czech Academy of Sciences. The recession has sent unemployment soaring to 27 percent in Greece and 16 percent in Portugal, compared with 7.6 percent in the Czech Republic.
Staying out of the euro has allowed the CNB to keep looser monetary conditions than the European Central Bank, Governor Miroslav Singer said at a conference in Prague on Nov. 22. The Czech main interest rate has been at 0.05 percent for a year, while the Frankfurt-based ECB lowered its benchmark rate to a record 0.25 percent this month.
“The CNB is taking advantage of the flexible exchange rate and independent monetary policy,” Daniel Hewitt, an economist at Barclays Plc, said by phone from London on Nov. 22. “They want to keep the koruna as a potential buffer.”