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Where did the Czech financial market disappear?

In September, the world marked the seventh anniversary of Lehman Brothers’ collapse, an event that triggered a global financial crisis. The world changed during this tumultuous period. While the recession is over and economic performance has been surpassing pre-crisis levels, changes in certain areas are permanent rather than cyclical fluctuation, representing a structural shift. One example is the Czech financial market. How has it changed over the last couple of years? The comparison is facilitated by the Czech National Bank’s data on the average activity on money and foreign currency markets and information about trade volumes on the Prague Stock Exchange.

Money Market

In April 2008, when the first indications that all is not well in the financial world started emerging (in March 2008, Bear Stearns had to be rescued), the Czech financial market was relatively calm; a lull before the storm that was to sweep through in September 2008. The aggregate daily average volume of all transactions on the Czech money market was CZK 107 billion at that time. Approximately three quarters of transactions included interbank deposits, and one quarter were FRA deals (forward rate agreement). The interest rate swap market was relatively small then. 

Seven years later, in April 2015, the aggregate volume of money market transactions was CZK 52 billion, ie 51 percent less. The volume of depository transactions fell by 42 percent. The FRA market ceased to exist. The relatively small swap market has shrunk even further. 

Foreign Exchange Market

Foreign exchange market trading suffered a similar fate. While the average daily turnover in currency trading was USD 9 billion in April 2008, it was only USD 3.6 billion, ie 60 percent less, seven years later. The volume of spot transactions dropped by 58 percent, the volume of forward and FX swap transactions declined by 60 percent. Option trading virtually ceased. 

In terms of currency pairs, the most notable fall was witnessed in trades between Czech crowns and US dollars where the trading volume fell by 73 percent. Trading between Czech crowns and the euro dropped by 46 percent. 

The foreign exchange market situation was markedly affected by the central bank’s proclaimed policy of maintaining the EURCZK rate at above 27.0 which, to some degree, eliminated the need to undertake FX rate hedging as well as room for speculative trades for some time. When speculations as to the timing and method of discontinuing the CNB’s foreign exchange market intervention emerged, the activity on the foreign exchange market, by contrast, substantially increased. 

Equities

The Prague Stock Exchange (PSE) turned out to be the worst hit. In 2007, equities worth CZK 4 billion were traded daily on average. This year, it is only CZK 701 million daily, ie 83 percent less. In relation to GDP, the volume of equities transactions was 26 percent in 2007; in 2014 only 3.6 percent. 

Two international banks, ING and Unicredit, discontinued or significantly curtailed their activities on the PSE owing to low liquidity. 

The PSE also shrank in size. In 2007, the market capitalisation of all companies traded on the PSE accounted for 41 percent of GDP; the current figure is only 14 percent of GDP. For example, the market capitalisation of the equities market represents 33 percent in neighbouring Poland, not to mention advanced economies with developed financial markets where market capitalisation is typically much higher. 

The Czech economy always relied on financial intermediation principally through the banking sector and financial markets were somewhat neglected.  During the crisis and in the post-crisis period, the significance of financial markets in the Czech Republic further decreased. While debates are continuing in the world that oversized financial markets harm rather than contribute to economic growth, we do not need to have any such concerns in the Czech Republic. By contrast, the underdevelopment of the financial market is a factor limiting economic development.

David Marek, Chief Economits, Deloitte