Czech Republic: On the way back to the good old days

The state budget deficit last year ended slightly lower than the Ministry of Finance planned, and we are bringing a positive bias into this year as well. The state budget for this year assumes a CZK252bn cash deficit, while we forecast CZK240bn due to the government's traditionally better performance. Together with the surplus of other sectors of the public finances, we expect the public deficit to fall from 3.4% of GDP last year to 2.5% of GDP this year.

The plan for this year is very favourable due to a lower planned deficit and exceptionally low redemptions. We thus expect gross redemptions to fall from CZK645bn to CZK456bn this year (-29% year-on-year). The vast majority will be covered through CZGBs issuance, which we calculate will fall from CZK519bn to CZK380bn (-27% YoY) in gross terms and net supply will fall by 29%. The Ministry of Finance also has to cover EUR2.5bn of needs this year coming from the maturity of euro-denominated Eurobonds and euro-denominated T-bills. We believe that EUR1.0bn will be financed through supranational loans and EUR1.5bn through the issuance of euro-denominated CZGBs under local law. However, the risk here is the use of more loans from the European Union or supranational institutions depending on market conditions.

Given the Ministry of Finance's very comfortable situation this year, we expect the issuance focus to be on the long maturities around the 10-year segment. Last year, the Ministry of Finance was very active in the secondary market, which we expect will be lower to cover this year's needs. On the other hand, in the second half of the year, we expect the Ministry of Finance to start switching bonds maturing in 2025 due to higher redemptions in the following year.