- Title: Czech firms get wake-up call as central bank nears crown cap exit
- Date: 22nd November 2016
- Summary: PRAGUE, CZECH REPUBLIC (FILE) (REUTERS) CZECH NATIONAL BANK (CNB) IN PRAGUE CNB SAFE DOOR LEADING INTO MONEY EXHIBITION VISITORS AT EXHIBITION VARIOUS OF EXHIBITED MONEY GIRLS LOOKING AT CZECH BANKNOTES CZECH CROWN 5000 AND 2000 BANKNOTES
- Embargoed: 7th December 2016 15:10
- Keywords: Czech central bank euro crown
- Location: PRAGUE, PILSEN, CZECH REPUBLIC
- City: PRAGUE, PILSEN, CZECH REPUBLIC
- Country: Czech Republic
- Topics: Economic Events
- Reuters ID: LVA00659J0XFD
- Aspect Ratio: 16:9
- Story Text: With investors positioning for the Czech central bank setting the crown free next year, companies are no longer waiting to hedge export revenue in markets even if they think the three-year-old intervention regime is not going away quickly.
A growing number of firms are looking to hedge now following a firming in forward markets as investors speculate on the expected end next year of the central bank's regime that has kept the currency weak since November 2013.
The Czech National Bank (CNB) has been guiding the market with more certainty to a mid-2017 exit from its policy of keeping the crown on the weak side of 27 to the euro.
However, analysts see risk to this end date if the European Central Bank, as many expect, extends a bond buying programme that makes up the centre of its own ultra-loose monetary policy.
The Exporters Association estimates the crown regime has earned firms 580 billion crowns ($23.45 billion) in extra revenue. But with the economy set to grow around 3 percent this year, the lowest unemployment in Europe and inflation seen back at target next year, that support may soon end.
Analysts see the crown undervalued by about 5-10 percent. A Reuters FX poll on Oct. 28 saw the crown at 26.25 in one year without the cap.
A firmer exchange rate is a major factor for an economy with exports making up 85 percent of gross domestic product and nearly two-thirds of that going to the eurozone.
To prepare, a growing number of firms are not only hedging, but also increasingly seeking supplier or customer contracts payable in euro. Banks also see rising demand for loans in euros from those hoping to benefit from a firmer crown.
"Everybody knows today that the Czech Crown is undervalued. That means we expect that the Czech Crown will strengthen in the future, but nobody knows if it will be 5 percent, 10 percent or even 15 percent," said Karel Havlicek, head of Sindat holding group and chairman of the country's small- and medium-sized business association AMSP, adding that companies should start to prepare "a minimum six months in advance."
Firms had gradually hedged on markets less because of repeated delays to the crown regime's exit. The amount of export revenue hedged for one year in markets fell to 25 percent in the second and third quarters, from 38 percent in the middle of 2015, CNB data shows.
But companies have been spurred once again by forward markets. The 1-year crown outright forward implied rate has firmed to 26.73 per euro, from 26.93 in August, and traded as high as 26.54.
To keep the crown at bay, the central bank has bought billions of euros from the market in recent months.
Foreign reserves have grown to $85.9 billion, or 45 percent of expected economic output in 2016, up from 21 percent in 2012, and are now bigger than Canada's reserves of $83.1 billion.
The bank has pledged to keep the crown from jumping after the exit, indicating it would tolerate a single-digit move.
Czech National Bank (CNB) Governor Jiri Rusnok told newspaper Hospodarske Noviny in October that if somebody devised a company plan that a single-digit percent change in the exchange rate could destroy, then "it would be better if they found a new (business) opportunity now".
To cope, exporters have steadily built contracts payable in euros, leaving them to worry only about paying wages in crowns. Almost a fifth of firms use this method now, up from 14 percent three years ago, a CNB and Industry Confederation survey shows.
Sindat, a group of biotechnology and nanotechnology firms with sales of 20 million euros, has gone this route, naturally hedging about four-fifths of revenue through contracts in a chosen currency. It hedges about 2.5 million euros in markets.
"I have to say that the small businesses in the Czech Republic are partly ready," Havlicek said.
Loans in euros are another hedging option - about a quarter of company loans are now in euros, up from 20 percent a year ago, CNB data shows. For some, it is a way to earn on the crown's expected gains.
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