Macro Analysis /
Czech Republic

Czech Republic: Gross financing needs to reach 9.2% of GDP in 2023

  • They should fall to about 6-6.5% of GDP in 2024-2025 because of lower debt amortization payments

  • Finance ministry plans issuance of CZK-denominated bonds between CZK 400-500bn and CZK 650bn in 2023

  • New Eurobonds appear highly unlikely, but FM will offer about EUR 3.3bn in EUR-denominated instruments under Czech law

EmergingMarketWatch
3 January 2023
  • Financing needs remain at similar level as in 2022

  • They should fall to about 6-6.5% of GDP in 2024-2025 because of lower debt amortization payments

  • Finance ministry plans issuance of CZK-denominated bonds between CZK 400-500bn and CZK 650bn in 2023

  • New Eurobonds appear highly unlikely, but finance ministry will offer about EUR 3.3bn in EUR-denominated instruments under Czech law

  • Energy crisis and geopolitical developments still pose a big upside risk to financing needs

Gross financing needs are estimated to reach CZK 649bn (9.2% of GDP) in 2023, according to the 2023 funding and debt management strategy of the finance ministry. Financing needs break down to CZK 295bn in state budget deficit, CZK 1.4bn operations with other financial assets, and CZK 352.5bn in debt amortization payments. The nominal level of financing needs is thus slightly higher than in 2022, when they reached CZK 635.6bn (9.5% of GDP), which was slightly lower than our estimate. The discrepancy is due mostly to the slightly better-than-expected performance of the state budget deficit, which added up to CZK 360.4bn in 2022, against a deficit target of CZK 375bn. Financing needs should fall visibly in 2024 and 2025, mostly due to less debt amortisation, as budget deficits are expected to close only modestly. The finance ministry expects financing needs to vary within the 6-6.5% of GDP range, though as we have seen in previous years, these are very preliminary numbers.

As far as debt funding in 2023 is concerned, the finance ministry envisages issuance of CZK-denominated bonds between CZK 400-500bn and CZK 650bn in 2023. The exact level of the lower issuance margin will be determined in view of how financing needs will evolve. We remind that the Czech government has some major fiscal measures against the energy crisis envisaged in 2023, including an energy price cap, whose potential fiscal cost was recently upgraded from CZK 170bn to CZK 200bn. This is probably the strongest upside risk to the 2023 deficit target, so debt issuance will be adjusted, if necessary.

New Eurobonds are unlikely, but some EUR-denominated instruments may be offered

Regarding fx-denominated instruments, the finance ministry has remained somewhat evasive, which is not unusual. Still, finance ministry officials said that there were plans to issue EUR-denominated debt for about EUR 3.3bn in 2023. Details will be determined depending on borrowing costs, market conditions and EUR-denominated debt amortization. The finance ministry didn't completely rule out Eurobond issuance, but given the policy led by the last couple of administrations, there has been a clear preference for EUR-denominated debt issued under local law, so we see the odds for a Eurobond as very low, especially given the current climate. The finance ministry also mentioned it could resort to EUR loans from IFIs like the EIB or the CEDB to finance fx-denominated debt in case market conditions are untenable. This appears a last-resort option, so the most likely outcome is EUR-denominated instruments under Czech law.

The finance ministry is already giving a tease, as it will offer 91-day EUR-denominated T-bills on Jan 18, which is a first. We see this as testing market reception, and if the outcome is favourable for the finance ministry, we may start seeing more EUR-denominated instruments at regular debt auctions. Amounts are still relatively low (EUR 500mn for the January auction), and comparable to what the finance ministry intends to offer in CZK-denominated T-bills anyway (CZK 10bn borrowing ceiling, compared to a CZK 12bn equivalent for the EUR T-bills).

All in all, the finance ministry doesn't offer any drastic change in funding strategy. On a not very optimistic note, we expect that the funding strategy will likely go through major revisions once more, given that risks to budget performance are pretty solid. The biggest unknown is energy prices, and these could turn again very unfavourable, depending on geopolitical developments. While energy markets are currently calm, it is mostly because of a combination of lower demand (and savings) and full gas storages across Europe. However, it is not likely to be the case in late 2023, so we will take financing needs estimates as not set in stone.