January 3, 2017 / 3:01 PM / 8 months ago

UPDATE 2-Czech budget shows first surplus in two decades

* Best result since 1995

* Driven by growth, strong employment, EU funds

* Drop in investments cut expenditure (Adds prime minister, analyst comments)

By Robert Muller

PRAGUE, Jan 3 (Reuters) - The Czech central state budget reached a 61.77 billion crown ($2.38 billion) surplus in 2016, the Finance Ministry said on Tuesday, the first result above zero since 1995 and a much better outcome than the market expected.

A surplus had been expected for several months due to a strong economy and labour market, low interest rates and a sharp drop in state investments, but its size is above market expectations of around 20 billion crowns and reduces borrowing needs.

The centre-left government had planned a 70-billion deficit, and sees a 60-billion gap this year.

"The government achieved a budget surplus thanks to economic growth, rise in employment and high income from the EU budget," Prime Minister Bohuslav Sobotka said on Twitter.

The central state budget makes up the bulk of public finance, where the Finance Ministry had estimated a deficit of 0.2 percent of gross domestic product.

The better central government result may put the overall balance - scheduled for publication in April - into surplus as well, Finance Minister Andrej Babis told a news conference.

Revenues were 100.8 billion crowns higher than initially expected, including a 64.8 billion higher income from the EU, while expenditures were 31 billion below plan.

The economic recovery cut unemployment to 4.9 percent in November, the lowest level in the EU, supporting consumption and reducing welfare costs.

The Finance Ministry estimates full-year economic growth at 2.4 percent in 2016 and 2.5 percent this year.

Babis said 2016 the surplus should cover part of state debt, which he said was at 34.3 percent of GDP.

"We as the ministry will propose to use (the surplus) to cut debt," he told a news conference.

But Sobotka said the extra money could also be shifted into 2017, which would eliminate this year's planned deficit.

Government bond yields have dropped into negative territory, thanks to the strong fiscal position but also due to foreign investors piling into Czech assets to take advantage of an expected decision by the central bank to let the crown currency strengthen later this year.

This has enabled the Finance Ministry to charge investors for lending to the government and cut debt servicing costs.

The budget surplus could further limit bond issuance, regardless of if it is used to cover debt directly or shifted into 2017 revenue.

"Generally, I would now expect lower issuance activity, that means smaller offer and downward pressure on yields," said Jakub Seidler, chief economist at ING Czech Republic. (Editing by Jan Lopatka and Robin Pomeroy)

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