Czech C/A gap narrows as dividend outflow slows

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PRAGUE, July 13 (Reuters) - The Czech current account deficit narrowed more than markets expected in May, data showed on Friday, suggesting the crown may have room to firm further as profit repatriation outflows seem to be ebbing.

The monthly deficit in the current account, a wide measure of trade and services flows between a country and abroad, reached 5.35 billion crowns ($260 million), data published by the central bank showed.

The market had expected a 9 billion crown shortfall in the high dividend season, according to a Reuters poll, following a 16.79 billion gap in April.

The current account deficit is running at a cumulative 12-month level of around 3.6 percent of the country's 2006 gross domestic product, according to Reuters calculations.

"The favourable numbers could support the crown in its move towards firmer levels," said David Marek, chief economist at Patria Finance in Prague.

The crown has rallied more than 1 percent over the past week to six-week highs versus the euro as worries over troubles in the riskier U.S. credit market led investors to pare back crown-selling positions used to fund high-yield investments.

The crown, a popular source of cheap funds for investors because Czech rates are the lowest in the European Union, traded 0.1 percent weaker on the day at 28.300 per euro by 0835 GMT. It was little changed from 28.275 ahead of the data.

"There is certainly room (for a firmer currency) given the real economy developments and an expected increase in interest rates," said Marek.

The Czech central bank is widely expected to raise interest rates to a near five-year high of 3 percent later this month, closing the current record yield gap versus the benchmark euro zone credit costs to 1 percentage point.

In May alone, the gap of the income balance on the current account, showing dividend outflows and profits of foreign firms that are reinvested in the country, was 14.84 billion crowns, down from 23.16 billion in April.

"Overall the balance of payments has been developing better then expected this year," said Michal Brozka, an analyst at Raiffeisenbank.

"The exchange rate has been driven by carry trades and the interest rate differential. If it was driven by fundamentals, it would be stronger now at around 28.0 to the euro," he added.

The financial account, which shows international investment flows, showed an 11.32 billion crown surplus, thanks mainly to foreign direct investment inflow.

Net inflow on the direct investment account was 12.25 billion crowns, which included 9.46 billion in reinvested profits at foreign firms in the Czech Republic, as estimated by the central bank.

($1=20.58 Czech Crown)

Keywords: CZECH ECONOMY/BALANCE