Czech's New Billionaire Leader Could Slow the World's Best Currency Rally

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He’s drawn comparisons to the U.S. president, but don’t expect billionaire Andrej Babis to deliver a version of the “Trump bump” after his dominant showing in Czech elections.

Unlike a rally in financial markets that followed Donald Trump’s win last November, Czech assets are at risk of a temporary loss of investor confidence because a fragmented parliament may delay the formation of the next government following a victory by Babis’s ANO party. 

The koruna has outperformed all currencies worldwide since the Czech central bank ended a limit on its gains in April, a rally also driven by a robust economy and the prospect of interest-rate hikes. 

While the ballot won’t derail the strong fundamentals, investors will probably stay on the sidelines until two or more of the record nine parties that secured seats in the lower house form a government, according to economists at Societe Generale SA and Raiffeisen Bank International AG.

“The rather surprising results, which are likely to render negotiations difficult, may trigger short-term market losses in the koruna and koruna-denominated assets,” Societe Generale analysts Phoenix Kalen and Marek Drimal wrote in a report to clients. “This past weekend’s parliamentary elections have ushered in higher political fragmentation and instability.”

Babis faces tough math to cobble together a ruling coalition. Just hours after its election triumph, ANO hit its first obstacle when potential cabinet partners said they won’t join a cabinet led by the tycoon as long as he’s facing criminal fraud charges. The second-richest Czech and former finance minister, who rejects the accusations, on Saturday night ruled out an alliance with anti-Muslim SPD and the Communists.

Here are some possible tie-ups and their implications for the economy and the markets as seen by Helena Horska, chief economist at Raiffeisen’s Czech unit:

ANO + Social Democrats + Christian Democrats

  • Teaming up with ANO’s current coalition partners is the most likely outcome, but an agreement “may take very long to materialize because the partners may have strict conditions for their cooperation”
  • “Such a coalition would more than any other support pro-cyclical fiscal policies, including growth in social spending”

ANO + Civic Democrats

  • While ruled out by the Civic Democrats, such a coalition “would probably be cheered by the market the most” because the parties could agree on a mix of tax cuts and higher investment in infrastructure and education
  • Given their euroskeptic sentiment, ANO and the Civic Democrats may delay a decision on joining Europe’s currency union

ANO + SPD

  • Cooperation with the upstart anti-immigration party would be “the least favorable” for the koruna because it could destabilize Czech politics and worsen ties with the European Union, which SPD wants to leave
  • Czech businesses would struggle to cope with a labor shortage by hiring more workers from outside the 28-nation bloc
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