The crown is supposed to fall, but it holds strong. Why is that so?

Last year, the current account of the Czech balance of payments fell into a sovereign, historically record deficit of over 415 billion crowns. A deep current account deficit is generally negative news for international currency traders. It creates pressure to weaken the country’s currency. However, the crown does not face such problems now. On the contrary, it strengthened against the euro to 15-year highs. Trinity Bank Chief Economist Lukáš Kovanda explains why this is the case.

The reason for the deep current account deficit is the massive outflow of dividends, also motivated by the banks’ efforts to reduce tax levies on extraordinary profits, and also the fact that the Czech Republic’s foreign trade fell into a record deficit.

Payment of retained earnings in covid

The significant increase in the volume of dividend outflows is also related to compensation for the situation from the time of the pandemic, when dividend outflows were administratively limited. Only last year, the owners of foreign companies operating in the Czech Republic compensated themselves for this “withholding of profits”. However, they were partly motivated by the tax on extraordinary profits to increase the outflow of dividends. This applies only from this year, but the companies concerned, i.e. selected banks and petrochemical and energy companies, already last year introduced various measures leading to tax optimization in order to reduce the tax liability resulting from extraordinary taxation.

Dividend outflows were already quite massive in the years before the pandemic. But then it was usually more than compensated by the foreign trade surplus in the current account of the balance of payments. But that was not the case last year. On the contrary, the result of foreign trade deepened the current account deficit.

Stanislav Šulc: Why does Fial’s government leave behind only losers?


Only history will judge how significantly the rule of Andrej Babiš left its mark on the Czech Republic. The same also applies to the current cabinet of Petr Fiala. But one thing can be judged already now. And these are the impressions of ordinary people. And here is one giant difference, which has now taken on giant dimensions again with the change in the valorization formula. While it was not better under Babiš, most people still felt like winners. Fial’s cabinet leaves behind only losers.

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Preparation for windfall tax

Last year, the foreign trade of the Czech Republic posted its largest ever deficit in history, almost 200 billion. Such a foreign trade deficit is completely unprecedented in modern Czech history. After all, in the period from 2005, foreign trade reported the highest deficit so far in 2008, when it amounted to 44.3 billion crowns, and was thus only about one-fifth compared to last year. Between 2011 and 2020, the Czech Republic’s foreign trade consistently showed surpluses, usually around one hundred billion or more.

The key reason for the Czech Republic’s deep foreign trade deficit last year was extremely expensive energy, especially oil and oil products, as well as gas. The Czech Republic is a net importer of them, so the consequences of last year’s war in Ukraine really had a noticeable impact on its foreign trade. Through a significant increase in the price of imports.

A deep current account deficit is generally negative news for international currency traders. It creates pressure to weaken the country’s currency. However, the crown does not face such problems now. On the contrary, it strengthened against the euro this year to the maximum since 2008.

Karel Růžička from Trinity Bank: Investors are closing risky positions.  It will only affect the crown to a limited extent

Karel Růžička: Investors are closing risky positions because of SVB. It will only affect the crown to a limited extent


The Czech koruna strengthened continuously during the first two months of this year, and this development surprised part of the financial markets. It reached its strongest level since the beginning of the year on March 1, when it was stronger against the euro by almost 3.5 percent and against the US dollar by three percent. This was done regardless of deteriorating fundamental indicators, such as the development of the current account of the balance of payments or the state’s budget management, points out Karel Růžička, Director of Treasury at Trinity Bank.

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The CNB is ready to defend the crown

Most international investors perceive that the dramatic deepening of the current account deficit is due to a combination of unfavorable circumstances, which most likely will not repeat themselves this year. after all this year’s foreign trade deficit should be roughly half of last year’s. At the same time, the “collection of retained earnings” by foreign owners will weaken this year compared to last year, as will their efforts to optimize tax due to the extraordinary tax.

In addition the koruna is helped by the high difference between the interest rate on the koruna and the interest rate on the euro or dollar and the readiness of the Czech National Bank to intervene at any time to support the Czech currency by selling foreign exchange.

However, a minority of international financial experts believe that the Czech Republic is even at risk of a currency crisis this year, precisely because of the high current account deficit. The Japanese financial house Nomura came up with such a forecast at the end of last year. However, this forecast is far from being fulfilled.

Petr Krčil, currency expert

Petr Krčil: Talk of a falling crown is a manifestation of the desperation of speculative capital


Japanese investment bank Nomura issued a report that the Czech Republic, Hungary and Romania are at risk of a currency crisis next year due to growing budgetary and external problems. Is the crown really that bad? “It’s complete nonsense. Our unemployment is below the textbook natural rate. As long as it is produced here, the koruna will not weaken, on the contrary,” thinks the leading domestic currency expert Petr Krčil from Art of Finance.

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ignature Bank's collapse followed the collapse of Silicon Valley Bank on Friday.

Another bank has collapsed in the US, but the Czech koruna is still getting stronger. For three key reasons


On Monday morning, the Czech crown strengthened below the level of 22 crowns for one US dollar. It was not at its strongest level against the US currency since the beginning of this month. However, at its current level against the dollar, it also surpasses most of the exchange rate levels at which it was traded during the month of February.

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All about inflation

Inflation scarecrow. What causes it? How to defend against her? How to invest, where to save savings, where there are decent interest rates, which bonds are worth it? How do the state, the government and the CNB fight inflation? Who and why increases the price and how much? How to cope with price increases? Is it the right time to get a mortgage, will interest rates rise or fall, and for what reason? Context, tips, hints, warnings.

High inflation troubles not only the Czech Republic, but also other European countries and the United States. See the overview in the world.

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