Czech C/A gap turns analysts bearish on crown

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The Czech current account posted its second-highest monthly deficit for the year in October on the back of chunky profit outflows, leading some analysts to raise the prospect of a weaker crown currency.

The gap in the external account tracking foreign trade flows and transfers of income swelled to 26.2 billion crowns ($1.25 billion), the second straight month when it reached nearly treble the market forecast, data showed on Wednesday.

The figure wrong-footed analysts' prediction of a 9 billion deficit in a Reuters poll, mainly because of a large dividend that Czech phone company Telefonica O2 CR paid to its parent firm Telefonica and other foreign owners.

"We expect to see relatively weak current account figures going forward," said Istvan Zsoldos, economist at Goldman Sachs.

"This, coupled with the large negative carry, should start to weigh on the currency in the next few months," he added.

Some analysts also said the burgeoning deficit might explain Monday's warning by central bank Governor Zdenek Tuma in a Reuters interview that the crown's rise to record highs to the euro and the dollar was on the verge of being "totally crazy."

But the crown -- the lowest yielding currency in European Union with the key policy rate one full percentage point below the benchmark euro zone level -- shrugged off the figure, supported by a buoyant mood on central European markets.

It held flat at 27.880 per euro by 1230 GMT, just a touch off an all-time high of 27.820 reached on Nov. 30.

'CROWN LOSING MOMENTUM'

The income balance deficit, part of the current account tracking profit repatriation by foreign investors, jumped to 30.4 billion crowns, of which 8.1 billion were funds that firms reinvested in the country and that did not leave its borders.

That was the second-biggest outflow of funds so far this year, lagging only a 36.3 billion crown gap from June.

Repatriation by foreign investors has exceeded analysts' expectations as a manufacturing and export boom fuels profits across an economy growing around 6 percent a year.

Some said the deepening external deficit might not weaken the currency but rather slow its trend appreciation that has strengthened it by 4 percent against the euro so far this year.

"The crown is losing its fundamental momentum, which should mean a slowdown of appreciation next year," said David Navratil, economist at Ceska Sporitelna in Prague, adding he expected the central bank to revise its estimate of profit outflows lower.

The 12-month rolling current account deficit -- a closely watched indicator of external imbalances -- widened to 4.6 percent of the economy's output as measured by gross domestic product (GDP), according to Reuters calculations.

David Marek, chief economist at Patria Finance, estimated the cumulative deficit could stay at 4.5 percent of GDP for 2006, more than double the 2.1 percent at end-2005.

"The external imbalance is reaching a level where the crown could start to be more sensitive to data on foreign trade and balance of payments," he said.

((For INSTANT VIEW of October balance of payments data, double click on the code in brackets: [ID:nL12287193]))

((Editing by Ruth Pitchford; Reuters Messaging: rm://marek.petrus.reuters.com@reuters.net; e-mail: prague.newsroom@reuters.com or marek.petrus@reuters.com; Tel: +420 224 190 477)) ($1=20.98 Czech Crown)

Keywords: CZECH BALANCE/

[PRAGUE/Reuters/Finance.cz]