Foreign investors now account for a striking 46% of Czech government debt, meaning the Czech Republic is the most popular destination for emerging market bonds among foreigners, Deutsche Bank said on September 4. The figure is some 14 percentage points up in the year to date.

On September 1, Fitch Ratings upgraded its outlook on the government’s debt rating of A- to positive from stable after the Czech Statistical Office revised the country's sec­ond-quarter GDP growth figure up from 4.5% to 4.7%. Even the initial figure blew forecasters’ projections out of the water, with analysts originally expecting somewhere around 2.9% growth.

Chief economist Pavel Sobisek of UniCredit attributed the record performance to higher household spending resulting from a nine-year record rise in wages, partly brought on by acute shortages of workers amid unemployment which, having hit record lows this year, is the lowest in the European Union. Chief economist Petr Sklenar of J&T Banka concluded that the spectacular growth was partly a result of the Czech Republic’s stable and healthy banks and economic competitiveness. Fitch emphasised the country’s liquid banking system - the loan to deposit ratio is 80% - which should ensure high demand for bonds.

Deutsche Bank said inflows into the emerging market debt asset class for the 18 countries it tracks had soared to an all-time high, growing $80bn so far this year to hit $780bn.

The Czech 2Q GDP advance drew on record growth that took place both in household consumption, which grew by 4.4% y/y and 1.8% q/q, and investment, which soared by 7.7% y/y and 6.3% q/q. Exports grew by 7.3% y/y (imports by 6.2% y/y), while government expenditure rose by 1.9% y/y.

Household consumption, which had been relatively stable over recent quarters, rose to pre-financial crash levels on falling unemployment, rising wages and growing lending. Investment, which had been erratic over recent quarters, grew in all segments, being slightly offset by a decrease in inventories (-1pp to GDP). During the first half of this year, the Czech Republic achieved further economic buoyancy from impressive commercial real estate volumes. In terms of Central and Eastern Europe, it was the stand-out performer with €2.2bn in investment.

J&T analysts said the central bank may now need to damp down demand, with the GDP results giving "a clear signal to the CNB [Czech central bank] that it should increase interest rates".