Czech Republic’s sovereign debt grows rapidly

The foreign indebtedness of Czech Republic is increasing. It had reached nearly CZK 3,200 billion, 70.4 percent of GDP, at the end of Q1 2016. Hence, the assets held by non-residents in the Czech Republic have risen by around CZK 220 billion in the past 12 month. This is not mainly public sector debt as foreign debt also includes private sector liabilities to non-residents, noted KBC Market Research in a research report.

Initially, the increase in debt appears to be negative news; however, it is predominantly due to the CNB executing its exchange rate policy. This is because deposits of foreign investors with domestic banks or their purchases on the Czech bond market automatically become debt. The increase in foreign indebtedness in the past 12 months is mainly due to the speculative capital inflow, which once bet on the Koruna departing soon from the intervention policy, and because of the increased demand for Czech government bonds from foreign investors.

The activity of foreign investors on the domestic bond market is increasing along with the extension of the quasi-fixation period of the CZK. Even if the Czech government bonds were nearly unattractive to investors earlier, they now hold around 25 percent of koruna bonds.

However, this is lesser than in Hungary or Poland. Thus the Czech market is not expected to be sensitive to any severe flight of investors, according to KBC Market research. Even if the banks’ liabilities and the state to foreign creditors are increasing, the business sector has reduced its debt.