Short Insight – Czech Republic: populism on the rise

by:

  • On 21 October, Babis’ movement ANO won the Czech Republic elections
  • Markets didn’t react to the election outcome
  • While ANO’s social policies may not be in line with the EU, Babis is a business oriented leader and the country will continue to profit from favourable global conditions
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1. The Czech ‘Donald Trump’ won the elections

After Hungary (the Fidesz party) and Poland (the PiS party), Czech Republic is next in line making a ‘populist turn’. The ANO movement, led by billionaire business Andrej Babis, secured victory in the latest elections. ANO advocates anti-immigration policies and opposes deeper integration with the EU. The euro-sceptic Civic Democrats (CD) were second with 11 per cent of the votes, followed by two anti-establishment parties. Many parties have promised not to work with ANO due to fraud allegations, so coalition forming will be difficult.

2. The reaction by the market was moderate

In the run up to the election the Czech Koruna gained against the euro. This was not driven by the election but by the hawkish comments from Czech National bank (CNB) as they announced on the 24th of October that multiple rate hikes are still possible this year. 10y bond yields increased to 1.681 just after the announcement, widening the premium over German bonds to around 1.3. This was also driven by the diversion in monetary policy of the CBN and the ECB. While the CBN does not exclude two 25pb hikes, the ECB communicated it will not hike before 2019. That said, Czech yields still remain one of the lowest in the CEE region.

3. Populist may be economically prudent

While some fear for discriminating policies and a worsening relation with the EU, the Poland and Hungary cases show that populist governments do not necessarily lead to a deterioration of economic fundamentals.

As the chart on the right shows, both the budget deficit and the current account deficit have improved over the years that PiS and Fidesz were in power. Hungary managed to get its budget deficit to 2% and Poland focused on its export sectors and thereby improved their current account balance. Hungary got upgraded by all three external rating agencies to investment grade in 2016, while both S&P and Moody’s changed their outlook from negative to stable on Poland in 2016 and 2017 respectively.

4. The Trump effect for the Czech economy?

The ANO movement does not pursue nationalist policies per se (such as Fidesz in Hungary), but is rather more business oriented. In the previous cabinet Babis has held office as finance minister. In these years he has got credit for reducing the country’s budget deficit and targeted tax evasion by linking cash registers to the tax office via internet.

Czech Republic will continue to profit from favourable global conditions and especially the uptick in growth in Eurozone. We expect growth to remain strong at 3.5% in 2018.