Czech Republic far from immune to the global financial crisis

EU leaders met late last week to develop a European strategy to combat the global financial crisis, and the Czech Republic too is set to tighten its belt in many key areas. Dominik Jun spoke with economist Tomáš Sedláček and began by asking him whether recent comments by Finance Minister Miroslav Kalousek that the county was in fact an “oasis” protected from the current crisis were true:

“Well, it is to a large extent true. We should not be affected by the primary cause of the crisis, so to speak. But we will be affected like the whole world with a gradual slowdown of economic growth. So the times when the Czech Republic’s GDP grew at 6 percent, those days are over, and we will return to more normal rates of growth of around three or four percent. This holds true for the whole region – our banking has been much more cautious.”

And why precisely does the post communist world seem to be more immune to the global financial crisis?

Unlike America and Western Europe, the Czech Republic is flooded with liquidity. What we observe to the west of us is a lack of liquidity. Czech banks and the whole banking system is flooded with extra cash. The Czech National Bank has actually been withdrawing money as opposed to what banks elsewhere in the world have been doing, which is injecting money into the system.”

And yet there are reports that Czech banks are going to be making it slightly more difficult for people to get credit and take out loans. Apparently, there are 160 billion crowns worth of banking loans out there in the Czech Republic and now it seems that banks are becoming more conservative in their lending.

“Yes, even our banks are taking a more cautious approach in response to what is happening around the world.”

And could that have a sort of domino effect with wary banks raising interest rates and then that causing some companies to struggle?

“Instead of raising interest rates, we expect that banks will impose more severe requirements before allowing people to take out loans.”

There have been reports that the Škoda car company is going to suspend manufacturing for a week at the end of October because of falling demand. We have also had the stories of the Crystalex glass company being in trouble, so it does seem that at least at the edges, there are some economic woes occurring in the Czech Republic.

“Yes, that is a secondary effect. We should not be affected by the primary effect as our banking system is healthy, but the secondary effect means that when our partners slow down their economic growth, we will be affected as well. The economy goes in cycles – it goes up and down, and we have had a very long period of very good years and very successful development. And now it seems that these extraordinary years are truly over and we have to adjust to something of a slower pace of demand. We will have to see how the car industry develops – of course that is an industry that this country is quite heavily reliant on and a lot will depend on how that develops. However, Škoda, as well as Hyundai are opening two new factories, so that should help in terms of the economy. And of course you have the question of demand, which is related to questions of price, so we should expect the prices of cars to decrease somewhat.”