Photographer: Martin Divisek/Bloomberg

Koruna Unchained Empowers Czechs on Path to Western Riches

  • Rising currency means cheaper beach vacations for tourists
  • Most major companies protected with hedging, exporters say

Twenty-seven years after the end of communism and then a painful transition to market economy, Czechs suddenly are feeling a bit wealthier.

The central bank in Prague Thursday removed the cap that had artificially kept the koruna weak against the euro for more than three years -- just as many Czechs are booking their summer beach holidays on the azure European coasts of their favorite destinations. While the removal of the currency shackles was almost a non-event on the financial markets, compared with the mayhem Switzerland caused when it ended a similar peg policy two years ago, Czechs reveled in the benefits of an appreciating currency.

Just hours after the cap’s demise, companies such as Zindulka boat charter brokerage were sending targeted text messages to clients, such as “strong koruna = cheaper boat. Now is the right time to reserve!” Tour operator Student Agency began advertising cheaper travel to neighboring Germany and Austria on the prospects of koruna gains.

The end of the curbs resonated with Hana Bastova, a 38-year-old kindergarten teacher who, along with her three kids and husband, sets off in the family van for a beach holiday once a year. They sleep at campsites to keep the cost to no more than 940 euros ($1,000) for the two- to three-week-long beach holiday.

“If the koruna gets stronger, it will be great,” she said by phone, adding they are considering a trip to Montenegro to bathe in the Adriatic Sea this year. “It would help us a lot. We really try to save every euro we can.”

The koruna has strengthened about 2 percent since the cap was removed, trading at 26.52 per euro as of 9:40 a.m. in Prague on Monday. Forward contracts indicate the exchange rate could gain another 0.4 percent over the next 12 months as a long-term appreciation trend would reflect the country’s economic growth outpacing that of the euro region.

While a rising currency may not always be a good thing for an economy that’s heavily dependent on exports and surrounded mainly by neighbors that use the euro, the Czech Republic’s main industries and services have had time to prepare for the cap’s removal. It was flagged by the central bank when it introduced the limit in 2013.

Czech President Milos Zeman, who detested the cap from its introduction and repeatedly called for its demise, was among the first to welcome the change to traditional monetary policy and a floating koruna.

“A proud nation should have a strong currency so that when we go abroad, we don’t have to be ashamed,” he said Thursday said during a meeting with voters in the central Bohemian town of Caslav.

Even before the end of the cap, the nation of 10.6 million tucked between Germany, Austria, Poland and Slovakia, was getting richer. The economy has expanded nearly five-fold since the fall of the Iron Curtain in 1989, to around $185 billion in 2015, according to World Bank data. Its 2004 entry into the European Union helped boost the koruna by about 20 percent, including the latest moves. Czechs now have the highest living standards among the post-communist EU nations, measured in economic output per capita -- though wages on average are only about a third of salaries in neighboring Germany.

From small family businesses to the country’s largest companies, such as Volkswagen unit Skoda Auto AS or power utility CEZ AS, exporters protected themselves against the potential effect of the cap’s lifting by buying financial instruments to hedge.

During more than three years of unprecedented currency stability, companies used the opportunity to raise wages and make investments, so they now should be well prepared for leaner years as the stronger currency eats into their profits, said Otto Danek, a vice chairman of the Czech Exporters’ Association who also heads engine producer Atas. The company exports 81 percent of its output to the euro region.

“A lot of companies used the time to invest into machinery and improve their effectiveness,” he said by phone. “If some didn’t prepare, they are either slackers or they must have lost their minds.”

— With assistance by Peter Laca, and Krystof Chamonikolas

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