Debt in the Czech Republic

An interview with Chief Economist at Česká spořitelna bank

Debt in the Czech Republic

Issues such as national debts, bail outs and bank lending are still featuring strongly in the media these days. In this interview, we throw the spotlight on the Czech economy, as David Navrátil, Chief Economist at Česká spořitelna bank answers questions on national debt and personal debt in the Czech Republic.

What is the current ratio of national debt to GDP? Has it worsened/improved over the first few months of 2011?
The ratio stood at 38.5% as at 2010, and it rose substantially over the last 9 years (from 24.1% in 2001 to 38.5% in 2010).This amount is still below the EMU average, but the pace of growth is above the EMU average.

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What are the reasons for this?
The bulk of the worsening happened in last three years – this is the clear impact of the financial crisis. But, even without the crisis, the general state of the public finances isn’t exactly good. The structural deficit of the Czech Republic (i.e., the deficit that the Czech Government would have if the effects of the economic cycle were removed) is even slightly worse than the EU average.

What impact are the measures introduced by the Government on 1 January 2011 having on the economy?
The overall effect was about 0.8 p.p. In other words, were it not for the Government measures, the 2010 GDP growth rate would be 0.8 p.p. higher.

Do you think the Government measures go far enough?
At the risk of sounding trite, I would say they go as far as the state of the economy and the political situation will permit. Of course, one can think of measures to driving the deficit down at a faster rate, but, but in all likelihood they would be unthinkable politically.

How will the impact of the Greek default affect Czech banks?
According to the tests of the Czech National Bank (CNB), the Czech banking sector is stable and is able to manage negative shocks. I would say that over regulation of the banking sector as was proposed after the crisis by the EU politicians could have a more negative effect on the banking sector and whole economy than the Greek default.

How does the Czech economy compare to that of other eurozone countries?
In structural terms it is like those economies that constitute the core of the EMU and has a similar structure to that of Germany in that both the share of industry and the degree of openness are large. However, if we’re talking about the indebtedness or structural strengths/weaknesses, then it is in better shape than quite a few EMU members: it is less indebted, less structurally challenged (in nowhere near as bleak a state as the weak countries on the periphery, with little overall macro imbalances).

How will the current economic crisis affect Czech euro adoption?
If we’re talking about the euro crisis, then it is safe to say that it will be delayed – not only because macro fundamentals have worsened (meaning that, for example, the Czech Republic doesn’t meet the Maastricht criteria now) but also because the attitude towards entry to the EMU have changed. However, the Czech elites (CNB, politicians and President) have always been suspicious of speedy entry, and the no-need-to-hurry attitude now appeals to ordinary citizens as well. This comes as no surprise given that last year or so the downsides to EMU membership (Greek bailout and talk about fiscal harmonization) were very plain to see. EMU membership went from being a coveted prize and having an aura of exclusivity, to being like a club with uncertain rules, weak oversight and dubious principles.


Can you give us an idea of consumer lending figures for 2010?
New loans volume felt by 25 % on y-o-y basis to  CZK 49bn. However outstanding volume continued to grow, although with a slower pace, of 8% (compared to 16% in 2009)

How serious is consumer debt in the Czech Republic?

Overall household indebtedness low comparing to EMU average. Consumer debt amounts to 5% of GDP (8% in the EMU). Regarding the portfolio quality, the NPL ratio of total households loans (including housing loans) is still slightly growing, but is expected to reach somewhere around 6% this year. This figure doesn’t pose any significant risk to both Czech the banking sector and Czech economy. The consumer loans to NPL ratio is now around 12%, which could be seen as more dangerous but given the low rate of indebtedness, it still looks manageable.

How has consumer lending changed over the past 10 years?

At the beginning of the last decade consumer debt amounted to just 1% of GDP. Since that time, new loan volumes have been sharply growing and topped CZK 75bn in 2008. In the aftermath of the financial crisis, volumes have started to fall, reaching CZK 49bn last year. The causes are due to both sides – the banks and the clients. Banks have tightened their risk policies, and clients are more responsible when taking out a loan.

How will consumer lending develop in 2011?
In y-o-y terms new loans are currently returning to growth. For this year we expect growth 10% growth to loans totaling CZK 55bn.

In conclusion, the Czech economy isn´t at its best, and consumers are having to be more careful about credit, but it is in stronger shape than other EU countries.

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