Macro: COVID-19 Update Czech Republic: Unprecedented measures and aid package

Containment measures: Czech authorities used toughest possible response to Coronavirus pandemic by closing borders and declaring the state of emergency for a period of thirty days. Chinese model of social distancing and South Korean model of active screening of population for COVID-19 were used. Growth outlook/sectoral impact: The impact of Coronavirus on economic activity is enormous. Large car manufacturers already shut down their plants in Czech Republic, tourism, transport, retail sector except larger grocery stores and restaurants/catering were severely hit too. As Czech economy is deeply integrated in EU labour division, the disruptions of the supply chain to be felt more severely in the country too. Altogether the pandemic aftermath can cost Czech Republic the equivalent of 9.3% of GDP. Q2 GDP is likely to nosedive close to 10%, while the recovery will start at best in Q3, if fighting the pandemic will be successful. In more downbeat alternative scenario a longer pandemic might drive Q3 GDP also down which will multiply the loss for the whole year. Some observers fear that the second wave of COVID-19 pandemic may come in late 2020. Rates/monetary policy:Czech National bank acted responsively by slashing key interest rate by 50bp to 1.75% on 16 March while another 50bp cut can be expected after regular policy meeting on 26 March. CNB also adopted liquidity support measures and canceled previously planned increase in countercyclical capital buffer. The regulator indicated the willingness to take bold actions, if such will be needed to fight the pandemic aftermath. Still, we expect the CZK to remain weak above 27 against the EUR while FX interventions may be used by CNB for volatility smoothing purposes. Fiscal policy:Czech government demonstrated strong resolve to contain pandemic and reduce its effects on national economy. The government rolled out the number of stimulus measures to help the affected businesses and socially insecure groups of population. Czech fiscal package in total might exceed the one promised by German government to citizens and business at 15% of estimated GDP. Although healthy fiscal situation in Czech Republic allows government to be more flexible in preparing financial measures, they nevertheless will have profound impact on budget deficit which may swell nearly 2.5x times higher than the planned CZK 40 bn. The government will also have to boost CZGB issuance to cover this deficit while rating outlook might suffer because of unprecedented fiscal loosening too.
This Research was produced and first published by Raiffeisen Bank International AG which is supervised by the Austrian Financial Market Authority and the National Bank of Austria.