Miroslav Singer: Gunning for intervention
Famed for his tough approach to regulation, Czech central bank head Miroslav Singer now has his sights set on currency market intervention to reflate the country’s flagging economy. He talks to Euromoney about the limitations of fiscal policy, the prospects for Czech adoption of the euro, and the dangers of regulatory integration.
Judging by the accuracy with which he doodles an automatic pistol on his notepad during the interview with Euromoney, Miroslav Singer is a man with experience of hitting his targets – an impression reinforced by his record at the Czech National Bank (CNB).
In his eight years there, first as vice-governor and then as the central bank’s head, Singer has played a key role in ensuring the stability of the Czech financial sector – currently one of the most profitable in the whole of Europe – and helping to keep the country’s economy on an even keel through the global financial crisis, the eurozone meltdown and numerous domestic changes of government.
Now, with his sights set on central bank intervention to weaken the Czech koruna, and despite resistance from within the CNB board, many analysts are betting that the governor will once again hit his target.
Singer has been making the case for currency market action since last autumn as interest rates in the Czech Republic approached the zero bound – which they reached in November – and has stepped up his rhetoric in recent months as returning growth has failed to translate into reflationary pressures.
|Czech central bank head Miroslav Singer|
Even under the CNB’s latest GDP forecasts, which envisage a fairly dramatic recovery from a contraction of 1.5% this year to 3.3% growth by 2015, consumer price increases are expected to remain below the bank’s target range of 1% to 3% over its 18-month time horizon. What is more, notes Singer, the current projection already envisages further monetary easing – which means that without it there is a real risk that the Czech Republic might experience Japanese-style deflation. "That is not our baseline scenario," he adds, "but effectively the model works with interest rates significantly below zero, which means it works with the assumption that a further policy relaxation will come."
At the root of the problem are a lack of consumer confidence, spare capacity in the economy and stable energy prices. Singer explains: "Wage growth is currently very moderate, individuals and firms are being very conservative in their purchase decisions, and we are working significantly below the output limits, plus worldwide energy prices are definitely not rocketing and this year’s harvest looks to be better than last year’s below-average one."
Under these circumstances, he argues, the only way inflationary pressures are going to emerge in the Czech economy "is if we create them". Unfortunately for the CNB, however, the options for doing so using what Singer describes as "the more normal parts of the monetary policy toolbox" are limited – as he notes, the already highly liquid and well-capitalized nature of the country’s financial sector mean US and UK-style asset purchases would have little effect.
That leaves FX intervention as "almost the only viable option", says Singer, adding that it would also have the benefit of supporting the country’s large export sector – although he stresses that this is not a direct concern for the CNB’s board.
"A weaker koruna will simply import inflation," he insists, "and that’s a healthy thing in an economy in which part of the weakness in retail activity and even investment is due to the postponement of purchases from speculative motives.
"Of course, the weaker currency will give even more comfort to exporters, which in turn will help reassure workers that they will keep their jobs and the government that tax income will be maintained. But overall our job is to meet our inflation target – we are not here to help exporters."
As to what level for the koruna might achieve these objectives, Singer refuses to be drawn, but analysts suggest his target is likely to be in the region of Kc26.5 to the euro, given that the exchange rate has already tested the Kc26/€ level several times this year. Indeed, some question the necessity for physical market action, given the substantial weakening of the currency since talk of intervention began in earnest.
Singer, however, is unconvinced. "I think most of us on the board would agree that, if you had told us nine months ago we could keep the rate relatively close to Kc26/€ with verbal intervention alone, we would have found that scenario far-fetched," he admits. "Nevertheless, I still think that further policy relaxation is going to be needed, and for that we will have to provide the real thing."
Whether he will be able to persuade a majority of his fellow CNB board members of the necessity for intervention at their next meeting on September 26 remains to be seen, but he has clearly already made considerable progress in that direction.
Vice-governor Vladimir Tomsik expressed his readiness to consider intervention as early as January, while Lubomir Lizal added his support in June, bringing the number of doves to three. Of the seven-member board, a further three – Pavel Rezabek, Kamil Janacek and Eva Zamrazilova – are dedicated monetary hawks, which leaves one potential swing voter, Mojmir Hampl.
Indications from the CNB’s last board meeting on August 1, at which intervention was rejected by a majority, suggest that Singer’s camp have so far failed to convince Hampl. Analysts note, however, that the fact that the issue was put to a vote for the first time marked a step forward for the easing faction, as did the inclusion in the subsequent presentation of a statement to the effect that "the likelihood of launching FX interventions to ease monetary policy has increased further".
Although analysts agree that the likelihood of Singer getting his way is increasing, some question the wisdom of intervention in an economy that is already showing signs of revival. David Navratil, chief economist at Ceska Sporitelna, says it makes little sense and could even risk killing off a recovery in consumer confidence. "It will decrease the purchasing power of households, just when domestic demand is finally beginning to return," he says.
Peter Attard Montalto, emerging markets economist at Nomura, agrees that the potential benefits from intervention – which he describes as "marginal" – are more than outweighed by the risk of damaging confidence in the economy. "It’s more of a sticking plaster than a cure," he says, "The impact will depend on whether consumers and businesses interpret it as a positive indicator or a sign of weakness. My fear is that, combined with the current political uncertainty, it will be seen as the latter."
|The resignation of prime minister Petr Necas in June has led to uncertainty over fiscal policy|
At the time of writing, the prospects for a resolution of that uncertainty had improved, following the dissolution of the Czech parliament – which had been in turmoil since the resignation in June of prime minister Petr Necas over a corruption scandal involving his chief of staff, Jana Nagyova – and the calling of snap elections for October 25/26. The opposition Social Democrats (CSSD) had a clear lead in the polls in late August and have indicated their intention to ease the austerity measures implemented by the previous administration and increase spending on housing and infrastructure.
Analysts agree that there would be room to do so without breaching the current 3% deficit target – which CSSD shadow finance minister Jan Mladek has already pledged to respect – thanks to the rapid fiscal consolidation achieved in the three years under the hawkish Necas.
The shifting alliances of Czech politics, however, prompt many to question whether the CSSD would be able to build an effective coalition before the 2014 budget comes before parliament in November. If they fail to do so, the current year’s budget would effectively be replicated – which, as Attard Montalto notes, would mean further fiscal tightening next year. "That would be good for yields and debt levels but not for growth," he adds.
At the central bank, however, Singer is undismayed by this prospect. Although refusing to comment specifically on political issues – "I’m always reluctant to look for faults in someone else’s area of responsibility" – he notes that the rapid turnover of governments in the Czech Republic, a result of the country’s proportional election system, tends to have little fundamental impact on fiscal policy.
"In my eight years on the CNB board I’ve worked with seven governments and we have had excellent cooperation with all of them," he says. "We have a system that works with frequent changes of government and allows fiscal policy to remain fairly stable."
He is also sceptical about the effectiveness of fiscal policy as a short-term macroeconomic tool. "It’s always difficult for governments to time fiscal measures well," he says. "Structural consolidation is clearly overdue [in the Czech Republic], but I’m not convinced that governmental policy can respond fast enough to counteract shorter-term macroeconomic imbalances.
"To put it another way, there are countries that currently have higher growth than the Czech Republic, but where debt has also increased quite significantly in recent years, and I’m not sure whether the stock of nominal GDP generated is justified by the increase in debt levels."
One political development that could have a big impact on the CNB, however, would be the adoption of the euro. The Czech Republic, like other late entrants to the European Union, is obliged by treaty to join the eurozone, but the issue is one that was largely ignored by Necas’s centre-right coalition because of intense resistance to the single currency in the country – support for the euro hovers around 20%, the lowest level in central and eastern Europe.
The topic was revived this spring, following the installation as president of former CSSD leader Milos Zeman, a noted europhile. Zeman commented in April that the Czech Republic could join the euro within five years, and this theme was echoed by Bohuslav Sobotka, the party’s current leader, most recently in late August following the dissolution of parliament.
Singer’s views on the single currency are fairly nuanced. While acknowledging the flexibility that an independent exchange rate has given the Czech Republic since the financial crisis, he notes that it might not be necessary for countries that can transform themselves into a very flexible, lightly burdened economy with other adjustment channels – although he stresses that, without those alternatives, a floating currency is essential for economic stability.
That ties in with his view – common among policymakers in the region – that the main lesson of the crises that have roiled the eurozone over the past three years is that euro aspirants must do their homework "and do it without cheating".
As he points out, some eurozone countries are performing well, including those with a longer history of operating with a currency fixed to that of Germany – primarily Austria and the Netherlands – but also newer members, such as Slovakia and Estonia, which benefited from reformist governments that made significant structural changes to their economies in the pre-adoption period.
By contrast, he cites Slovenia as a prime example of a country that appeared to be ready for eurozone entry but has subsequently run into trouble. "That proves the point that if you don’t prepare your economy in a structural sense you are going to face serious difficulties in a fixed exchange rate situation where you have no scope to adjust monetary policy," he says.
With regard to more existential questions around the single currency, he is cautiously optimistic, but comments that the question of whether the geographical scope of the eurozone is sustainable remains to be seen. "We hope it is, but the next couple of years will give an answer one way or the other," he adds.
Singer is even more cautious about expressing an opinion on the handing of the eurozone crisis by its politicians and central bankers, tactfully refusing to be drawn on the subject at all. "Any feelings I have about the responses to the eurozone crisis of EU policymakers, who are my colleagues in many cases, I keep to myself or voice to them – because I hope my colleagues would to do the same for me!"
He has no such reservations, however, about voicing his vehement opposition to the idea of regulatory integration without monetary union. "When it comes to regulation, it is essential that there is a direct correspondence between rights and responsibilities," he says. "Information sharing may be valuable, but as soon as the liability for regulatory mistakes falls to a particular group of taxpayers, their treasury must have ultimate responsibility for its decisions."
As such, he argues, banking union makes sense for countries inside the single-currency area – but little for those outside. "Banking union is a way to share some of the cost and the benefits of eurozone membership in a way that in any normal currency zone – whether it be the Czech koruna zone or the Swedish krona zone – are simply transferred through the fiscal system.
"The eurozone needs some of these channels to survive within its current scope, but for us it probably makes more sense to wait and see how it works, given that we have nothing to gain in the way of potential benefits from early membership."
Unlike policymakers in some other non-euro countries, Singer is unperturbed by suggestions that being within the EU but outside the single currency could have a negative impact on the Czech banking sector or economy.
"There will always be parts of regulations that you don’t like and parts that you relish," he says, "and we should always bear in mind the benefits that come from being under a single regulatory umbrella that provides access to a common market."
Singer is also sanguine about the ability of the Czech Republic to make its voice heard at the European negotiating table, with or without single-currency membership – an attitude that was strengthened, he says, during recent discussions around banking union and the single supervisory mechanism.
"Those experiences have made me confident that, as a country outside the eurozone, if we work hard enough and are transparent with our European partners we can achieve at least some of our goals, if not all of them."
And, he adds wryly: "Being from a smaller economy, I’m used to the idea that you won’t be able to get everything you want in negotiations."
It undoubtedly helps that, when it comes to regulation, Singer is speaking from a position of unusual strength. Not only is the Czech banking sector one of the most profitable in the EU – average return on equity came in at 21.4% last year despite persistent recession in the wider economy – it is also among the most stable. System-wide capital adequacy stood at 16.4% of risk-weighted assets at end-December, while non-performing loan levels have remained stable at 6.2% of the total for the past three years.
That this has been achieved despite the dominance of foreign banks in the Czech Republic is a testament to the competence of the CNB – although, perhaps surprisingly, Singer insists that 90% foreign ownership of the banking sector is not a regulatory challenge.
"I don’t see any major issues with it and I’m always puzzled when some of my colleagues do," he says. "The best starting point for regulating a system such as ours is simply not to worry about the question of ownership and keep a level playing field."
Indeed, far from resenting the high level of foreign ownership, Singer notes approvingly that it helps to prevent "supervisory capture". As he explains: "Our supervisors are used to the idea that they won’t find comfortable retirement positions on the boards of regulated entities, and that helps them to do their job more efficiently."
Singer also sees the relatively undeveloped nature of the Czech financial system as a strength rather than a weakness – and brusquely rejects any suggestion that a more western European degree of sophistication would be desirable.
"I’m not a fan of highly complex scenarios in banking in which nobody really understands what they’re dealing with – I like to see things called by their proper names," he says. "I don’t think it’s about sophistication, it’s about ensuring that the market is legible for supervisors."
As he points out, the concept of a conservative financial sector based on traditional retail and corporate business, such as exists in the Czech Republic, is something that is increasingly being held up as a model by policymakers in more developed countries. "I would say that we are a good market to be in today, whether you call it a market of the past or – as many supervisors and regulators in other countries would like – a market of the future," he says.
He is, therefore, understandably impatient with suggestions that the CNB’s rigorous approach to capital and liquidity requirements risks damaging growth in the real economy. "I’m relatively sceptical when those whose banking sectors have not been in such good shape tell me I’m too conservative," he says.
"Those who have achieved a higher degree of stability in their financial systems in the past are in a stronger position to voice their opinion simply because, I’m afraid, they did a better job. I’m not saying they got it right but they did a better job."
Where Singer does see a danger is in the idea that a single regulatory framework either could or should be devised to cover all the world’s banking markets. As he points out, if a global integrated framework had been in place five years ago, many more countries would have been implicated in the financial crisis.
"The idea that regulatory integration can only be beneficial stems from an entirely incorrect belief that it is possible to create a perfect regulatory framework, which – given the fundamental uncertainty of financial markets – is clearly not possible in the real world," he adds.
"You can work to improve your regulatory framework, you can build up capital and liquidity buffers, but you also need to make sure you diversify your frameworks, because at any point in time some are going to be right and some are going to be less right."
Singer is characteristically realistic about the limits of regulation. "We will have crises in future and anybody who tells the public that we can prevent any future crisis with the measures we are taking now is a blatant liar!"