Czech bank governor warns economy could shrink by 2%

By Jan Cienski in Prague and Thomas Escritt in Budapest

Published: March 23 2009 02:00 | Last updated: March 23 2009 02:00

The Czech Republic could see its economy contract by as much as 2 per cent this year if the recession worsens in western Europe, warned Zdenek Tuma, the governor of the export-oriented country's central bank.

"At this moment the risks are on the downside," Mr Tuma said in an interview with the Financial Times. "We cannot avoid the impact of a world economic slowdown." The prediction is much grimmer than the bank's official forecast, which says the economy will shrink by 0.3 per cent this year. Mr Tuma admitted that the bank's forecasts were changing rapidly. Just a couple of months ago, it was predicting the economy would grow by 2.9 per cent.

However, despite the gloomier outlook, Mr Tuma insisted that his country had one of the healthier economies in the region, and would not need help from the International Monetary Fund or other international institutions to ride out the economic crisis. "There is no doubt that some countries will need help from international institutions," he said. "I see no need for IMF or other help at this time."

His comments came as Hungary was thrown into a fresh bout of political uncertainty at the weekend after Ferenc Gyurcsany, prime minister, announced he would resign. Mr Gyurcsany said he would stand down because he was perceived as a hindrance to economic reforms, vital to the crisis-hit country's recovery. With Hungary facing difficulties managing its IMF rescue programme as it slides deep into recession, investors will be watching to see whether Mr Gyurcsany's successor can restore stability.

Meanwhile Prague is convinced it cannot spend its way out of the downturn. The centre-right government of Mirek Topolanek, prime minister, has focused on helping companies keep up employment by reducing some social security contributions and amending tax regulations, but is shying away from pouring money into the economy on the US and UK model.

"If there is a drop in foreign demand, such a sizeable drop cannot be substituted for by the government," said Mr Tuma. "The role of the government is to mitigate the impact mainly through automatic stabilisers."

Mr Topolanek faces a vote of confidence tomorrow in parliament, where he controls only 96 out of 200 MPs.

Reliance on exports, which are equivalent to about 80 per cent of gross domestic product, was the Czech Republic's biggest vulnerability, said Mr Tuma.

However, other parts of the economy are much sounder than in the rest of the region. The banking system is liquid and has almost none of the foreign currency loans that are causing concern in Hungary and Poland. Prague has been trying hard to accentuate those differences so as not to be lumped with central Europe's more problematic regions, such as the Baltics and the Balkans.

The region's central banks and bank regulators have issued several joint statements underlining their differences, and the drumbeat finally seems to be having an effect, with signs that sounder currencies such as the Czech koruna and the Polish zloty are detaching themselves from the more troubled Hungarian forint.

"What is positive is that capital markets are starting to differentiate among the countries of the region," said Mr Tuma.