The Czech Republic’s Net International Investment Position

This Country Focus analyses the accumulation of net liabilities by Czech residents with respect to the rest of the world. We show that, unlike most other EU-10 countries, the main driver of the deteriorating net international investment position (NIIP) has been investment in equity such as foreign direct investment. The bias towards equity and a low level of debt in the NIIP are positive factors that reduce the exposure of the Czech economy to international financial disturbances. We note, however, that the inflow of investment has contributed to the emergence of moderate vulnerabilities such as rising house prices and increasing indebtedness of households. Moreover, it went hand-in-hand with considerable wage growth in all sectors of the economy. This has led to a rising gap in unit labour cost between the tradable and non-tradable sectors because the non-tradable sector was not able to keep pace with the productivity increases achieved in the tradable sector. Addressing these issues would strengthen the sustainability of the Czech international investment position.