Fiscal Consolidation and Reduction of Borrowing Needs in the Czech Republic

Fiscal consolidation and reduction of borrowing needs in the pipeline for the Czech Republic

Fiscal policy is showing the first signs of improvement, but consolidation will not take place until next year. This year's supply of Czech government bonds is under control and the significant reduction in borrowing requirements for next year will soon come into the spotlight. FX issuance is no longer a topic thanks to EU money.

 

Fiscal policy: Improvement but still a mixed picture

The June state budget result showed a reversal of the negative trend for the first time this year. The improvement is higher than we expected, but still this year's budget will be a risk both ways for Czech government bond (CZGB) issuance. The story remains the same from the beginning of the year. While spending is on track for the Ministry of Finance (MinFin), tax revenues are lagging. In detail, we see that personal and corporate income tax is in line with the plan or even slightly higher. On the other hand, indirect taxes such as VAT and consumption tax are lagging behind the plan, confirming the slump in domestic demand in recent quarters.

Looking ahead, we can expect the deficit to deteriorate again in July and then improve in August and September due to the incoming historically record dividend from the state-owned energy company and the windfall tax. So the picture will be mixed for the rest of this year. We leave our deficit forecast for this year unchanged at CZK320bn, versus the MinFin's plan of CZK295bn. This, together with the surplus of other sectors of the public finances, should result in a public deficit of 3.8% of GDP. However, we may still see some changes here from the government, which wants to assess this year's state budget during the summer and perhaps introduce some savings measures for this year.

 

State budget development and 2023 forecast (CZKbn)

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For next year, the government recently approved a CZK235bn state budget deficit and is targeting a public deficit of 1.8% of GDP, which includes the approval of a savings package. This is starting to be discussed in parliament, however, we expect this to be an issue in the autumn months. Given that the government has a majority in both houses of parliament, we expect the key parameters to be approved.

 

 

Since the beginning of the year, the MinFin has covered about 54% of this year's CZGBs issuance, according to our calculations, assuming the higher state budget deficit we forecast vs the MinFin plan. This is less than CEE peers Poland and Romania but still fully under control and well positioned for the second half of the year when we can expect lower CZGB yields. For the rest of the year, we expect the monthly supply of CZGBs to be about the same or only slightly lower than the first half average. This is confirmed by the indication for July of CZK19bn, with the MinFin traditionally trying to avoid lower summer liquidity.