The Czech Republic will emerge from the financial crisis faster than many other countries, thanks to quick thinking and self-reliance, says Gernot Mittendorfer, head of retail-banking leader Česká spořitelna.
The Czech Republic holds an advantage over other countries affected by the financial crisis in that Czech companies’ reacted to the crisis promptly and efficiently, and many businesses’ financial reserves are helping them through the hard times. Households have lost little and are more self-reliant than households in Austria, says Gernot Mittendorfer, head of Česká spořitelna, the largest Czech retail bank. “Thanks to this, the Czech Republic will emerge from the crisis faster than many other countries,” he says.
There have been signs recently of a recovery in western Europe. Do you think the eurozone is coming out of the crisis?
When you look at the main indicators, including business confidence, it really seems that the worst is over for the eurozone. What will be important is how things are shaping up at the beginning of next year. Whether we are coming into moderate, long-term growth, or one-off growth followed by decline again. This is hard to predict.
The development forecasts for the Czech economy range from optimistic ones, predicting a decline of around 3%, to pessimistic ones saying that GDP will fall by more than 4%. What do you think?
Whether the decline reaches 3% or 4% is not that important. It does not make that much difference in the end. What I think is positive is that the development in the Czech Republic is not as bad as elsewhere; the Czech Republic is doing much better. It is clear that the country is in recession – there is lower economic output and a drop in demand. At the same time, the Czech Republic is much more stable and resistant. It has been doing quite well in the crisis, as we had expected. How quickly the economy starts growing again is much more important than how many percent it drops. Economic growth will be worse this year, but next year the economy will see an improvement.
What makes you think that the Czech Republic is coping better with the crisis?
Companies reacted to it promptly and efficiently. They reduced capacity, postponed investments and cut costs. Many firms created reserves in previous years and those are now helping them cope better with the situation. Also, we have recently registered certain improvements in how businesses repay their loans, compared to the first two months of the year. The delays in installments, which some companies have experienced, have been reduced in many cases.
Small companies have said repeatedly in recent months that they are getting smaller loans from banks and even have to repay some loans early. Do you agree with that?
When you look at the development of loans that our bank provided to small firms in the first half of the year, their total volume increased 3%. A decline came with large businesses, but not because we were unwilling to lend them money. Companies have simply cut their investment because of the crisis, postponed their investment plans and thereby reduced their need for financing. But the overall portfolio of our loans is growing. I cannot rule out individual cases such as you describe, but there is not a trend. The slower growth in loans corresponds to more caution on behalf of firms regarding their debts. The same is true for households.
How are companies coping with the crisis now? We have witnessed steady growth in unpaid loans. They made up roughly 3.8% of loans at the beginning of the crisis, but according to May data from the Czech National Bank, 5.7% of loans are now in default.
When an economy falls from roughly 6% growth into recession so fast, some companies are going to end up in big trouble. Some will be unable to repay loans and will gradually disappear from the market. I think the volume of unpaid corporate loans will continue to grow, but the trend will culminate this year because companies will be hit hardest by the crisis this year. Next year, the situation will start improving. On the other hand, the situation regarding loans to households will get worse because unemployment will still be rising.
How big a wave of bankruptcies can we expect?
I do not want to speculate. There will certainly be more of them than in the past, but it will not be an enormous amount. As I said, the way enterprises in the Czech Republic reacted to the crisis was totally efficient. I also think, actually, that ordinary Czechs are coping with the crisis better than my compatriots in Austria. Austrians have long been accustomed to the state securing many things for them automatically, and now it turns out that they cannot rely on that completely. Czechs are more used to relying on themselves. I think that, thanks to this, the Czech Republic will emerge from the crisis faster than many other countries.
What sectors will stabilise first?
The weakness of all forecasts at the moment is, we do not know how demand and orders will shape up after the various support and stimulus programmes that governments have created are exhausted. But I would say that those hit hardest by the crisis will be the first to get out of it. My forecast is that suppliers to the automotive industry and the automotive industry itself will be the first to experience a turn for the better. Their situation will begin to stabilise first, next year.
Part 2 of this interview will appear in Friday’s issue of the Prague Daily Monitor.
