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Update No: 063 - (23/07/02)

Social Democrats to the fore
The Czechs have re-elected the Social Democrats to power. The situation has changed, however, since they have a new premier and are in coalition with the Christian Democrats and a group of free-market liberals, itself known as Coalition. This obviates the need to placate the opposition Civic Democrats, as the government had been doing for the last four years.
The Civic Democrats, led by Vaclav Klaus, who in those four years helped set the legislative agenda as speaker of parliament, see their position radically reduced. Klaus' career is probably over, having agreed to step down at the party congress in December, although he could stand in the New Year for the presidency when his old foe, Vaclav Havel, retires.

Communist come back
The big surprise of the election was the good showing of the communists, who obtained 18.5% of the vote, reflecting widespread disaffection at the bottom end of society. But the Social Democrats with 30% of the vote remain the main force on the left. If the new coalition does not work with the Christian Democrats and the Coalition they could switch to the communists as coalition partners, an unlikely but not impossible eventuality, giving them leverage and command of the situation.
There are many Social Democrats averse to cooperation with the Communists; but others who have in mind a French-style left coalition in which the Communists are signed up with several ministries, but have to go along with government policies not to their liking.

Coalition compromises
It is still very early days for the new coalition as to what its own policies will be. The Social Democrats promised many things, 200,000 new jobs, construction of houses for the younger population and entry into the EU by 2004, a likely achievement.
But Premier Vladimir Spidla will have a lot of negotiating to do with his new partners. None of the parties could comment in late June on coalition talks. But one thing is sure, the days since 1989 when Spidla's predecessor, Milos Zeman, and Klaus would dominate Czech politics are truly overr.

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BANKING

Zivnostenska frontrunner Uicredito Italiano confirms formal offer for bank

Italian bank, Unicredito Italiano, has confirmed it has made a formal offer for an 85.16 per cent stake in Zivnostenska Banka, the last major Czech bank not in foreign hands, The Prague Business Journal has reported.
Other reported contenders in the race have declined to comment on the Zivno sale. However, fellow Italian bank, Banca Intesa, one of the eight likely bidders, has ruled itself out of contention.
HVB Group was tipped to make a formal offer ahead of the deadline, the date of which seems to be in question.
Sanpaolo-IMI spokeswoman, Antonella Vicenzino, said the deadline for formal offers has been extended to an unspecified date. "I cannot say at this point whether or not we have made a formal offer for Zivnostenska," added the spokeswoman for the Italian bank.
Unicredito spokeswoman, Viviana Vestrucci, has confirmed that the bank made a formal offer for Zivno, but could not provide any further details.
While representatives of HVB Czech Republic reiterated that they had originally provided a written expession of interest, they declined to comment further. But the head of HVB Group's Central and Eastern Europe division, Martin Grüll, was quoted as saying that the bank would made a bid for Zivno. Other potential bidders for Zivno were tight-lipped. German bank Bayerische Landesbank and Austrian bank Volksbank were unable to comment on the sale and representatives of GE Capital Bank and Citibank said they were not able to confirm or deny buying interest.
Potential buyers for the majority stake held by troubled German bank, Bankgesellschaft Berlin AG (BGB) had until May 27th to provide a "written expression of interest to participate in the sale process" to sale adviser Schroeder Salomon Smith Barney in London. Representatives of Schroeder said they could not discuss potential buyers or when the deadline for final offers would fall.
Unicredito Italiano, seen as a frontrunner for the purchase after failing last year to buy Komercni Banka, and HVB, confirmed that they had provided a written expression of interest and a another Italian bank, Sanpaolo-IMI, confirmed indirectly that it was still in the game.
As the Czech National Bank is currently not issuing any new banking licences, analyst believe the stake in Zivno is a last chance for international banks to get a solid foothold in the Czech retail banking market.
Analysts believe that Unicredito is very keen to gain access to the Czech market to complement its operations throughout Central Europe, and this could push the bidding up. Economists have estimated that the deal could net €150m to €200m for BGB. An announcement on the name of Zivno's new owner is expected with three months.

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FINANCIAL NEWS 

Czech currency surges, but not all are pleased

It is not much solace to Czech manufacturers, but the country's long-derided currency, the koruna, has been among the strongest in the world this year, the International Herald Tribune reported on 5th July.
It has risen robustly in value against both the euro and the dollar, reaching record levels early in July when the dollar fell to 19.07 koruny.
The koruna - the name means crown in Czech - is worth about 16 per cent more in euro terms today than it was a year ago, and 27 per cent more against the dollar.
That may lift a few egos in Prague and send Czech consumers out to the shops for imported goods. But in the longer term, economists say, it could hasten a fundamental shift in the Czech economy. And if that shift is not carefully managed, they say, the strong koruna could send unemployment rocketing and undermine the newly elected government's political standing.
The Czech National Bank, the country's central bank, has said that the koruna has risen out of line with economic fundamentals. The bank has tried half-heartedly to stem the tide by reducing benchmark interest rates a full percentage point so far this year, a move intended to make Czech financial assets a bit less attractive to foreign buyers. Analysts expect another half-point cut this summer. But money keeps pouring into the republic anyway, in the form of foreign direct investment, purchases of privatised assets and speculative cash riding the koruna's rise.
Beyond the central bank, economists say strong economic fundaments will keep the koruna rising for a while yet. With the country's privatisation programme largely completed, investors say they think most of the debt that once clouded the transition from Communist-era central planning to a market economy is now in the open and that there are not many nasty surprises left to uncover.
A rush of foreign direct investment in export-oriented manufacturing plants is testament to the widespread view that the country will be economically stable and healthy over the next three to five years. And within that time frame comes a big prize: the expected entry into the European Union in 2004.

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INDUSTRY

Tractor maker fails to get back on track before transfer

Czech tractor producer, Brno-based Zetor, appears to be stuck in a loss-making rut on the eve of its scheduled transfer to new owners, Prague Business Journal has reported.
Slovak company, HTC Holding was due to sign an agreement with the Czech government by 1st July, to take over a 98 per cent shareholding in Zetor.
A settlement with creditors of the tractor manufacturer is due to be completed by July 14th. Claims should have been partly met through the sale to HTC Holding. Because of the delayed sale, the Czech Consolidation Agency (CKA) had to provide a Kc 800m guarantee that the claims will be honoured.
In late June Zetor announced an operating loss of Kc 160m for the first five months of the year. It posed a loss of Kc631m in 2001 on sales of Kc 2.9bn, a 2.5 fold increase from 2000. The projected sales target was Kc 4.9bn.
Management blamed the most recent and 2001 losses on the failure to meet increased manufacturing targets stemming from the return to series production. "The shortfall was caused by problems with export funding, the global recession in tractor sales, the firming Czech currency and the postponement in an entry of a foreign partner," said CEO Vratislav Goj.
Instead of the originally planned output and sale of 7,000 tractors, Zetor managed to sell only 3,456 units in 2001. The company also sold 1,300 tonnes of forgings and spare parts worth Kc 305m. Exports accounted for 90 per cent of sales with the US, Poland, Ireland, Hungary and Croatia being the biggest buyers. The company said it raised its penetration of the Czech market to 36 per cent.
The company employs over 2,000 with 800 more in Zetor subsidiaries. Goj said the company hopes to continue with the same number of workers since this is the minimum required to produce 450 tractors a month. 

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SCIENCE & TECHNOLOGY

Government moves ahead with high-tech subsidies 

CzechInvest, the Ministry of Industry and Trade's agency for foreign direct investment, says the government intends to set up two new support programmes - one for "strategic services" and one to create and enhance technology centres. Strategic services include customer care, shared services, software development expert and IT solution, and high-tech repair centres. 
In order to qualify for a subsidy, companies are required to invest a minimum of 50m Czech crowns (or 25m crowns in regions with higher unemployment) for at least five years, of which 25% must be financed from equity capital. In addition, they must allow for the creation of at least 50% export orientation. Subsidies for technology centres are aimed at innovation activities in the area of pre-production rather than fundamental research, Europmedia.net reported. Although the criteria is similar, the minimum creation of at least 15 new jobs with less than 40% of non-resident workers. Reportedly, six multinationals have already expressed an interest, with hopes that this figure will shortly double or even triple.

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TELECOMMUNICATIONS

Czech Vegacom buys ST network building plant

Slovenske Telekomunikacie (ST) sources say the company has sold its communications network building plant to Czech telecoms firm Vegacom. They did not disclose the price of the deal. Involved in the integration and maintenance of telecommunications networks, systems and private networks, as well as construction of conduit systems and related activities, Vegacom, which assumed various operations of the former TMP Praha telecom, recorded sales of 1.2bn Czech crowns in 2001.
Vegacom participated in the digitalisation of the Czech dominant telecom operator Cestky Telecom and the installation of communications network for Ceske radiokomunikace, Bluebull reported. TMP Praha sold Vegacom to an unnamed venture capital fund in April last year. Deutsche Telekom controls ST with a 51% stake; other main shareholders are the Transport Ministry (34% share) and the Slovak National Property Fund (15% share).

Cesky Telecom prepares 3bn crown bonds issue

Cesky Telecom, a fixed-line operator, will issue 3bn Czech crowns in bonds on July 15th. The bonds, to mature in 2005, will carry an interest of 4.55 per cent and an issue price of 99.91 per cent, CTK News Agency quoted co-arranger of the issue, Ceska sporitelna. 
According to Ceska sporitelna, Cesky Telecom is refinancing its debt portfolio in auspicious market conditions. The Prague Stock Exchange will list the bonds. 
Cesky Telecom held a general shareholders' meeting earlier in June to approve a bond plan, valued at 20bn crowns. The telecom group will use the first issue to refinance bonds of seven billion crowns, which were paid out in advance in February. The telecom group's overall loan burden is less than 20 per cent, accounting for one of the lowest figures in the domestic telecoms sector. The issue is favourable for many before the company is privatised, experts were quoted as saying. 
The Czech government is giving up its 51.1 per cent stake in Cesky Telecom, along with a 27 per cent share package held by the Tel-Source consortium. Potential investors Deutsche Bank and CVC Capital Partners were requested by the government to submit their increased bids by July 19th, CTK reported.

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TRANSPORT

EIB to grant EUR210m for construction of Plzen bypass 

Finance Minister, Jiri Rusnok, and Jean Vrla of the European Investment Bank signed a contract for a EUR210m (Kc6.35bn) loan for building a bypass around Plzen, which the city will start drawing in September and will repay by 2025, Transport Minister, Jaromir Schling said, Czech Happenings has reported .
The EIB funds will enable opening of the two longest sections of the bypass by December 2003. Without this loan, the completion would be delayed until 2010. The 4 km mid-section will be put in operation later in 2006 due to court disputes with environmentalists.
The loan covers half of total costs of the bypass, said Rusnok. Repayment will start in 2009. "It is impossible to get better interest conditions on the market," said Rusnok. "I hope the next government will not prolong instalments until 2025." Asked by CTK News Agency about the amount of interest, Vrla said only that it depends on the period of drawing the loan and the exchange rate developments.
According to information gained by CTK, the interest is below 6 pct. Rusnok said the state investment will be returned within ten years.
Schling further said that the German party has pledged that a connecting motorway to Amberg will be ready by 2007. Head of the Roads and Motorways Directorate (RSD,) Petr Lausman, said that one-quarter of the planned Kc12.7bn costs of the construction has already been spent. 

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