* FinMin sees improved external environment in 2010
* 2009 fcast cut to 5 pct contraction from 4.3 pct
* Bond issuance to stay near this year's level
(Adds details, quote, wraps in bond issuance story)
By Jana Mlcochova
PRAGUE, Oct 29 (Reuters) - The Czech economy should grow by
0.3 percent in 2010, the finance ministry said on Thursday,
leaving its forecast unchanged from July, despite the approval
of a government austerity package.
The forecast, updated every three months, cut expectations
for this year's growth to a 5 percent contraction, from a
previously seen 4.3 percent shrinkage.
It had earlier said the 67.3 billion crown ($3.74 billion)
belt-tightening package -- which hikes indirect taxes and cuts
some social fees -- would cut 0.8 percentage points from
predicted growth next year.
That would have meant shrinkage of 0.5 percent, taking into
account the ministry's previous 0.3 percent growth forecast.
But it said "new facts" tied to the external environment,
inflation, and the labour market, showed the 0.3 percent growth
forecast could remain unchanged despite the negative effect the
package would have.
However, structure of growth would be "significantly"
different compared with the previous outlook, with the main
factor being an improvement in the trade balance due to an
improving growth outlook for the global economy.
"The dominant element will be the foreign trade
contribution, mainly due to a recovery in partner countries on
the side of exports, and restrictions coming from the package
for domestic demand on the side of imports," the ministry said.
Politicians grudgingly supported the technocrat government's
austerity package, which caps the 2010 central state budget gap
at 162.7 billion crowns, below an originally planned record 230
billion, meaning an overall public sector gap of 5.3 percent.
That will keep Czech bond issuance in 2010 will near this
year's elevated levels. Also on Thursday, Finance Minister
Eduard Janota said the ministry would issue 260 billion to 300
billion crowns ($16.66 billion) in debt. []
"Approximately 160 billion (crowns in borrowing is needed)
for the budget deficit and at least 100 million on principal
payments of old debt," Janota said in an interview released on
the Finance Ministry's Web site.
"I estimate the issuance of bonds between 260 and 300
billion crowns."
RATES, OUTLOOK
The central bank will release main points of its new
quarterly outlook next Thursday when it meets on rates. Its
August forecast sees 2010 growth at 0.7 percent.
The economy shrank by 5.5 percent year on year in the second
quarter, the deepest drop on record. Inflation was at zero in
September and the central bank said it could briefly drop below
zero in October.
Most analysts expect the bank to stay put at a monetary
policy meeting next Thursday despite remarks by Governor Zdenek
Tuma and Vice-Governor Miroslav Singer pointing to more easing,
including using non-standard easing tools.
Czech central bank board member Robert Holman said last week
the austerity package was a downside risk to the bank's
inflation outlook due to its expected demand-shrinking effects.
Inflation has remained subdued in times of a severe economic
downturn allowing for Czech borrowing costs to sink to a record
low of 1.25 percent.
Tuma has warned of a protracted deflation if the crown
currency kept firming but the unit has fallen 4 percent since
his comments, putting less restriction on price growth.
The ministry cut outlook for the 2009 annual consumer
inflation rate to 0.9 percent from 1.1 percent and upped the
2010 forecast to 1.4 percent from 1.1 percent, far below the
central bank's 2010 target of 2 percent plus or minus 1
percentage point.
It said 2009 overall public sector gap would be 6.6 percent
of gross domestic product. It said it would not be able to bring
the shortfall to the euro zone-prescribed 3 percent threshold by
2013, as required by EU authorities.
(Reporting by Jana Mlcochova; Editing by Andy Bruce)
