Saturday, October 18, 2008

Czech Financial Sector Struggles as Retail Sales Growth Drops Sharply In August

Central European stocks dropped again on Friday, led by the banks, following the announcement that Goldman Sachs had lowered its economic forecasts for the region and the decision of Fitch Ratings to cut Hungary's foreign- debt rating. The Czech Republic's PX Index slumped 10 percent.

An index of investors' and analysts' expectations for the CEE region over the next six months plunged to minus 51.1 points in October from minus 30.6 in September according to latest the survey from the ZEW Center for European Economic Research and Erste Bank AG.

Goldman reduced the Czech Republic's 2008 growth forecast to 4.3 percent this year from 4.4 percent, while the 2009 outlook was changed to 2.5 percent from 3.8 percent.

Komercni Banka AS, the third-largest Czech bank, fell the most since 1999. OTP Nyrt. slid to its lowest level in almost five years after HSBC Holdings Plc downgraded Hungary's largest bank on concern its loan expansion may slow and credit quality worsen, while Bank Pekao SA, Poland's biggest bank, posted its steepest drop on record.

Komercni lost 530 koruna, or 17 percent, to 2,510 in Prague trading. Erste Bank AG, Austria's biggest publicly traded bank, slid 2.39 euros, or 10 percent, to 21.6 euros in Vienna.

New World Resources NV, the Czech Republic's biggest maker of coking coal for steel producers, plunged 22 percent to 111 koruna, its lowest since debuting on the bourse in May, after U.K. Coal Plc, the nation's biggest miner of the fuel, fell the most ever in London trading after saying full-year output will ``significantly'' miss a previous target because wet weather curbed third-quarter production.

The NTX Index of 30 companies in the region retreated 4.4 percent to 951.42, the lowest in almost four years, even as stocks in western Europe rose after a two-day selloff. The PX Index's drop was the biggest fluctuation among equity markets included in global benchmarks. Hungary's BUX Index fell 2.4 percent, Poland's WIG20 Index lost 6.4 percent and Austria's ATX Index declined 3.3 percent.

Clearly the financial turmoil has now crossed over the CR's doorstep, and is increasingly making its presence felt. In the meantime, and as Goldman note, the real economy is slowing.

Retail Sales Contract In August


The latest piece of evidence we have for this is the fact that Czech August retail sales fell the most in six years as inflation damped consumer spending and two fewer working days than a year ago cut shopping hours. Inflation adjusted sales (excluding automotive sales) were down 2.6 percent, compared with a 3.4 percent increase in July, according to data from the Czech Statistical Office earlier this week. Working day adjusted sales were down 0.3 percent.




If we look at the evolution of retail sales in the above chart the slowdown is evident, now we need to factor in the impact of all the financial turmoil, which is still very much a "work in progress" as far as Eastern Europe is concerned.

5 comments:

vlade said...

Edward, could you please direct me to somewhere where I could find the most recent breakdown of Czech trade balance? (by country) I tried to google/bloomberg it but no luck.. Thanks,

Edward Hugh said...

"could you please direct me to somewhere where I could find the most recent breakdown of Czech trade balance?"

OK. Go to the stats site:

http://www.czso.cz/eng/redakce.nsf/i/home

Click "calendar" at the foot of the top box in the middle (News Releases Latest Data). Go down to the first entry for October "External Trade". They have a countryt breakdown table you can click on at the foot of the page you will open (in a new window probably).

That's the best you can get right now without digging right into the stats data base, and even then I'm not sure what you can easily find. Hope that helps.

Edward

vlade said...

Many thanks Edward.
I'm curious how some people in CZ keep saying "it's not our problem, we don't have a crisis" with the economy (and its growth) so dependent on EU27 markets, with Germany and Slovakia being almost 40% of all exports (and both of them are likely to suffer in the next couple of years). If we say that eurozone drops by 0.8% next year, and do a back-of-the-envelope calculation, it could mean about 3% yoy export drop (3.5% drop in EU economy & 85% exports heading there. Simplified, but would do as an estimate). That will affect GDP quite a bit - I couldn't find a detailed decomposition on the site where I could plug just different import/export numbers and see the impact on GDP.
EU zone will moreover get a currency advantage, because EUR dropped vs. USD (which I believe the majority of EU exports is priced in), while CZK went up agains EUR (which I believe is what most of the CZK exports are priced in).

One more question though. Any idea what is the wholesale funding/domestic deposit ratio for CZ banks? (i.e. how much they rely on foreign credit to lend)

Edward Hugh said...

Hi again,

"I'm curious how some people in CZ keep saying "it's not our problem, we don't have a crisis" "

Well this is a problem right across the CEE I think. Of course the CR does have one of the stronger economies, at least on the face of it. But that doesn't mean you won't get a recession, since this is more than likely going to be a regional thing in 2009.

"with Germany and Slovakia being almost 40% of all exports (and both of them are likely to suffer in the next couple of years)."

Exactly, and Germany is headed into what seems to be a quite sharp and ugly recession as far as I can see. Did you know that Germany exports almost as much to the CR as it does to China?

"If we say that eurozone drops by 0.8% next year, and do a back-of-the-envelope calculation, it could mean about 3% yoy export drop (3.5% drop in EU economy & 85% exports heading there."

Oh yes, you're definitely on the right track here.

"while CZK went up agains EUR (which I believe is what most of the CZK exports are priced in)."

Well, this is the position at the moment, but as the central bank lowers interest rates and sentiment towards the CR changes, the koruna could drop significantly, which I think would be fine for exports, and probably not too bad for households, since I'm not sure there has been that much fx borrowing given the low rates available locally, but could be very bad news for banks if they had been funding lending in euros, of even worse (the Austrian banks) in CHF.


"Any idea what is the wholesale funding/domestic deposit ratio for CZ banks? (i.e. how much they rely on foreign credit to lend)"

I don't know, but interesting how we come round to the same point. Basically if you look at the way the Prague stock market has crunched to a halt when Erste have a problem, and then there is Orco. I think there is a lot of dirty washing about to come out for cleaning.

vlade said...

Very interesting. I never thought about the impact of the FX moves on the CZ bank financing, but this may actually explain the fast appreciation of CZK (as they would be buying CZK with their borrowed EUR/CHF, supporting appreciation of CZK). It would be very interesting to look at the correlation in the growth of the domestic credit and the CZK move vs. EUR, which could be an indirect indication of the level of foreign funding.

Totally agree on the CZK probably detoriating, my worry would be that it will kill the exporters before they manage to recover.