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CZECH REPUBLIC


 

 
Key Economic Data 
 
  2002 2001 2000 Ranking(2002)
GDP
Millions of US $ 69,590 56,800 51,400 43
         
GNI per capita
 US $ 5,560 5,250 5,310 68
Ranking is given out of 208 nations - (data from the World Bank)

REPUBLICAN REFERENCE

Area (sq.km) 
78,600

Population 
10,264,212 

Density 
(per sq.km) 
132.2

Capital 
Prague 

Currency 
Koruna 

President 
Vaclav Havel

Private sector 
% of GDP 
80%

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Background:
After World War II, Czechoslovakia fell within the Soviet sphere of influence. In 1968, an invasion by Warsaw Pact troops ended the efforts of the country's leaders to liberalize party rule and create "socialism with a human face." Anti-Soviet demonstrations the following year ushered in a period of harsh repression. With the collapse of Soviet authority in 1989, Czechoslovakia regained its freedom through a peaceful "Velvet Revolution." On 1 January 1993, the country underwent a "velvet divorce" into its two national components, the Czech Republic and Slovakia. Now a member of NATO, the Czech Republic has moved toward integration in world markets, a development that poses both opportunities and risks. 

Update No: 077 - (01/10/03)

Dealing with catastrophe
The Czechs are feeling sorry for themselves. Last year they were flooded out, with their beautiful capital, Prague, suffering terribly. This year they have had, not too much, but too little, water, a frightful drought. There are not many Czechs left who disbelieve in global warming.
A further reflection, inevitable to contemplate, is that if the Czechs had already been inside the EU they would have been entitled to even larger subventions than they actually got. They are thankful that they will soon be members, by May 2004. 
Actually EU entry was so dearly sought as proof that they are Westerners. They have indeed been so for a long time. In 1938 at the time of Munich they were the only country in Central Europe to be a democracy and had the highest standard living on he continent, due to a successful capitalist economy. But due to Neville Chamberlain and the appeasers they had to endure fifty years of totalitarianism, first fascism and then communism, under foreign occupation.
This story deserves to be a parable of the foundation of the modern West; and, thanks to Churchill and the opening volume of his war memoirs 'The Gathering Storm,' it is, in which Munich is presented as the terrible betrayal of the West and its ideals. As Churchill said at Chamberlain's funeral: "Poor Neville. History will treat him very badly. I know, because I shall write it."

The modern predicament
To return to the much more mundane natural catastrophes of late, the Czech Republic has had a difficult time of late. In 2002, the Czech Republic ran a deficit of 7.3% of GDP. This was due not least to the costs of coping with the flooding. The deficit could be as high this year, partly due to the effects of drought. State spending is over 50% of GDP and the budget deficit is expected to be over 7% again of GDP in 2003. Moreover, the country is suffering from the usual blues of the Central Europeans right now, above all slow growth in the EU. 
The crisis in the forint, the Hungarian currency, in June did nothing for the Czech crown either. All the Visegrad powers are seen by the markets as having over-extended economies with fiscal problems and an uncertain outlook.
The Social Democratic government of Premier Vladimir Spidla is in trouble. It has a bare majority in parliament and now has a hostile president in the old warhorse of the conservatives, Vaclav Klaus. The largest strike in the country since 1989 took place on September 1st, when the teachers staged a one-day strike at inadequate pay. The teachers are the bastion of the natural constituency of the Social Democrats But to have yielded to their demands would have worsened what is already shaping up to be the record deficit that the economy has ever had. The budget was set to be debated by parliament in the second half of September.
Some reforms are going ahead. The government plans to reduce benefit costs by trimming index-linking. But it has neither the will nor political wherewithal to make a real dent on the problem of excessive state spending. A centre-right successor would be more plausible in the role of retrenchment and reform.

Havel again in opposition
Six months after his retirement from the presidency of the country, Vaclav Havel is once again its foremost dissident. He is strongly censorious of his successor, Klaus.
Recently, as the Czechs prepared to vote in a referendum on whether to join the Union, Klaus and other politicians studiously avoided calling loudly and clearly for the Czechs to vote themselves into it.
But Havel jumped into the fray, appearing at a Prague rock concert held to get out the vote and urging his fellow citizens to vote yes. (They did).
In a clear swipe at Klaus, who oversaw the often-corrupt post-communist privatization effort, Havel said that only criminals could find European Union membership a threat.
Klaus's camp replied in kind. "Ex-presidents certainly have a role," said Ladislav Jakl, an advisor to Klaus, "but comments like that undermine the democratic value of a free vote."

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AUTOMOBILES

Truck maker seals bank finance deal, but will still end 2003 well in the red

Managers at Tatra have promised an improved second half after losses at the Koprivnice-based truck maker deepened in the first six months of the year. But the company still expects to end the year in the red, reports the Prague Business Journal.
The company sustained a loss of Kc497m in the first six months compared with a loss of Kc33m for the same period a year ago. Revenues fell to Kc1.277bn from Kc1.366bn; according to the report the company sent to the Prague bourse.
The report said that a marked improvement in results for the second half should be based on contracts already signed and others pending with Russian buyers, which should provide the basis for higher sales.
The company also said that negotiations with banks had resulted in resuming credit and that credit limits have been raised. No further details were given, and the company was unwilling to provide any.
Tatra recently suffered through a cash crisis. For several weeks in June, 250 Tatra staff had to stay at home receiving 60% of their wages or were forced to take holidays because there was not enough money to pay them. "Some operations were held up because the company didn't have enough money for purchasing materials needed for production," said Pavel Baron, the vice chairman of main trade union at the truck maker. The plant has been plagued by such problems in recent years.
In June, the company owed health insurance companies and the state social security administration over Kc110m.
The agreement with the banks on fresh credit and prospects of fresh sales and ongoing cost cutting will not be enough to turn around the result for this year, the report said. "Not even a substantial growth in sales and the positive effect of restructuring reflected in lower costs in the second half will suffice to eliminate the entire loss from the first half," it stated.
Tatra sold 737 trucks in the first six months compared with 692 a year ago, Even so, its earnings have been affected by the strength of the Czech crown against the dollar and a lack of operating capital. The company plans to sell 2,000 trucks this year, Tatra signed a contract for the supply of 35 trucks and spare parts worth US$8m to Russian oil company, Surgutneftegaz. In early April, a joint venture of Tatra, its shareholder Terex Corporation and STV USA-American Truck Company won a tender for the supply of 315 military vehicles to the Israeli Ministry of Defence. In late April, Tatra signed a contract for the supply of 481 trucks to India by March 2004.

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AVIATION

Aero building more choppers and still hanging on for India jet deal

The Czech aircraft manufacture,r Aero Vodochody, received an order recently from partner Sikorsky Aircraft Corporation (SAC) for another 11 Sikorsky S-76C+ helicopters as part of the 10-year contract with Aero, sales and marketing vice-president, Viktor Kucera, said.
The helicopter program is keeping Aero busy these days. The company, which aim its production at the civilian and military aircraft markets, signed the contract with Sikorsky, a subsidiary of United Technologies Corp, in 2000 to assemble helicopters sold to foreign markets through the US-based SAC. The Czech News Agency (CTK), reported that the contract is worth US$300m (Kc8.9bn).
The order of an additional 11 helicopters will raise this year's output to 21 at Aero. Next year the company plans to produce 26 S-76C+s, Kucera said. But the total number of helicopters Aero will produce for Sikorsky will ultimately be determined by the company's sales, Kucera said.
Sikorsky has found a niche in selling the helicopters to offshore oil companies, global airlines and search-and-rescue emergency medical service missions, company media relations manager, Sheena Steiner, said. "This has been a tremendous year for us, especially for the S-76C+ model.. we managed to sell 15 S-76C+s above the plan with the option of an additional 24 units," she said.
Besides the helicopter program, Aero is involved in another civil aircraft joint venture project with Ibis Aerospace, which is part of a Taiwan-based Aeropace Industrial Development Corporation. In August, the company signed a contract for nine Ae270 Ibis passenger planes worth Kc600m.
The aircraft should be supplied to Florida-based distributor East Coast Jet Centre, which will buy one aircraft next year and eight aircraft over the next two years. Overall, the number of orders for the aircraft grew to 76. Supplies of the aircraft will start next year. Aero will supply 15 aircraft in 2004, 35 in 2005 and expects to sell 45 in 2006.
Meanwhile, the company's core business, the fighter jet L-159, is still looking for new markets and appears to be the single best long-term hope of saving the financially strained Aero.
Aero's 2002 annual report states the company is likely to fall into loss after the Czech army is finished paying for the 72 L-159 fighters it ordered from the company. "After 2003 when Aero will have received all payments for the remaining 14 L-159s, the company will not be able to show positive results," the annual report states.
In mid-July, the government extended a state guarantee for a revolving loan worth US$300m to Aero until June 2008.
The company still hopes to sell 66 new L-159B two-seater jet trainers to the Indian government. It started talks with India in May 2002 that still have reaped no results. "It is a very complicated political decision," Aero's Kucera said and added that the Indian government had not made its choice.
However, the Indians have been looking for a training jet for 10 years, and only one aircraft was officially considered before Aero made its proposal - BAE Systems' Hawk trainer. The main advantages of the L-159B should be its lower price and the fact that the aircraft is much newer than the Hawk. "The Indian side reportedly finds the British aircraft (Hawk) too expensive," Aero board chairman, Antonin Jakubse, told the Prague Business Journal last year.

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Israel interested in Czech training plane

A team of Israeli pilots and engineers will inspect the L-159 training plane in the Aero Vodochody plant, company president, Antonin Jakubse, told CTK News Agency on 8th September. He added that there are other seriously interested parties, but he said he did not want to name them.
"We believe that the plane is of such quality, compared to the competition from other planes, that sooner or later we will be able to break through on to the market," Jakubse said.
Information about Israeli interest in the plane was recently presented by the daily 'Lidove noviny' (LN). According to the paper, the Israeli Defence Force (IDF) has several offers for new training planes, including French and British planes.

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ENERGY

200 new windmills to be built in mountains


Czech Venti, owned by British investment group, Virtual Utility and the Czech company Proventi, plans to build and operate up to 200 power generating windmills in the North Bohemian Krusne Hory mountains, Interfax News Agency has reported. Total investment in the project should reach 13.8bn Czech crowns.
Nearly 100 windmills with output of 170 MWh are to be built in the first phase of the project. The construction will start in April 2004 and should be completed in August 2006, the firm announced on its web site.
Virtual Utility will provide the know-how and funding for the project. Britain's BAE Systems will also participate in the venture, and is to secure financing for the project. BAE should gain a minority stake in Proventi in the future. The British company wants the project to be included in an offset program by the Czech government, to whom the firm is offering supersonic jets for sale.
CEZ, the Czech monopoly power generator, launched the first wind power plant with a capacity of 315 kW in 1993, also in the Krusne Hory mountains. CEZ also operates three wind power plans with capacities of 220kW, 315kW and 630kW at Mravenecnik in Moravia's Jeseniky mountains range.
The government would like to see the share of power-generating windmills and other alternative sources in total electricity production increase from the current 28 per cent in 2010. 

Power supply deals expected to reveal new dominance of 'Super CEZ'

The dust has largely settled on one of the biggest energy deals in recent Czech history - CEZ's controversial acquisition of just over half the regional electricity distributors in the country - but the full impact of the country's biggest electricity producer also becoming its biggest distributor is just beginning to become clearer, the Prague Business Journal reported recently.
A lot of the questions about the benefits to CEZ of ownership of five of the eight Czech regional distributors and the effect on its rivals should be answered.
The five distributors supply more than 3 million customers and between them employ more than 7,000. CEZ has said that the acquisitions are aimed at strengthening the company so that it can become one of the major players on the Central European electricity market.
The annual round of negotiations between regional distribution companies and electricity producers, starting in September and sometimes lasting until just before Christmas, should indicate whether CEZ is being strengthened at the expense of rival electricity producers on the Czech market. Specifically, it should become clear whether the company has exerted pressure on its distributors to buy CEZ's "rainbow power."
CEZ has to also flesh out the future shape of its cooperation with the distribution companies it dominated and among the individual distributors themselves. It should also spell out where the promised synergies and savings from its fresh acquisitions exist.
Most electricity distributors already rely on CEZ to supply most of the electricity they sell on to homes and businesses on the partially liberalised Czech electricity market.
Nonetheless, the handful of significant independent power producers in the Czech Republic, such as United Energy, ECK Generating and Elektarna Opatovice, still supply around a third of regional distributors' power needs. Cries of anguish from these foreign-owned companies could well suggest that their worst fears about CEZ cutting them off from some of their major customers are coming true. CEZ has already flexed its muscles and replaced or reshuffled chief executives at most of the distributors it now dominates.
"We will have to wait and see how CEZ uses its influence with regard to the annual supply contracts," said the head of one independent power producer who asked not to be named. Although distribution companies do have longer-term supply contracts with independent producers, they still rely on annual supply contracts for a significant part of their power supplies, he added. "the details of such contracts are commercial secrets," he explained.
CEZ says that the distributors under its control will be free to buy electricity wherever they want. Moreover, it maintains that they will also be able to carry on their current activity as traders, selling electricity they have purchased on the Czech market in competition with parent company CEZ.
Roman Cenek, an energy analyst with brokerage Atlantik Financni Trhy, said he expects CEZ to increase its share of power supplies to regional distributors but more as a result of its competitive price offer than the pressures of ownership. "CEZ must make a competitive offer because the regional distributors have to sell on a competitive market to large buyers of electricity," he added.
There will still be a place on the market for independent power producers, who can also target large industrial buyers, Cenek said. CEZ now has a surplus of electricity due to the Temelin nuclear power plant, much of which it must export at discount prices compared with those in the Czech Republic.
But in a few years it will have to renew some of its coal-fired power plants in northern Bohemia. This will widen opportunities for the independents, Cenek added.
Recently CEZ said that it had identified possible savings of Kc1.8bn a year from cooperation between members of the CEZ group, the power production company and five distributors. It expects the full benefits of these savings to be felt in 2005.
Most of the early savings identified by the 12 working groups which make up the "REAS Project," aided by management consultant AT Kearnet, have been "horizontal," between the regional distributors themselves. "We are analysing best practice in each of the regional distributors and on the basis of comparisons, the first possible savings have emerged," CEZ's spokesman said in an e-mail reply to questions.
In its company newspaper, Zpravodaj, CEZ said that savings between regional distributors could come from combined call centres, joint product and strategy development of the distribution network. Parent company CEZ would open up the possibility of cheaper bank loans and financing for the distribution companies by taking advantage of its high credit ratings.
The REAS project includes one regional distributor, Severoceska Energetika (SCE), even though CEZ has earmarked it as the company it will sell in order to comply with conditions imposed by the Urad pro Ochranu Hospodarske Souteze (UOHS) for clearance of the distribution deal.

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FINANCIAL NEWS

Falling crown adds heat to reform debate

Ahead of strikes by teachers and civil servants planned recently across the nation, economists sounded the alarm that failure to pass the government's fiscal reform package could weaken the Czech crown and slow down the economy, the Prague Business Journal reported.
They singled out for special criticism the reform proposals of the trade unions, which have significant influence on the centre-left Social Democrats (CSSD), the dominant partner in the coalition government.
Prime Minister, Vladimir Spidla, who has staked his political future on reform, has a fine line to read if he wished to survive with disgruntled union members and rebel CSSD MP, Josef Hojdar, on one side and CSSD's coalition partners on the other.
The reform package is aimed at reducing the state budget deficit to 4 per cent of GDP by 2006, compared to an estimated 7.6% for 2003, and to save some Kc270bn (US$9.12bn) during that period.
In what analysts and opposition politicians criticised as creative accounting recently, the Ministry of Finance announced that it had discovered an extra Kc11.4bn in revenues for 2004 that could be spent without affecting the planned budget deficit of Kc118bn. Economists said the government would likely use the money in part to meet the pay demands of teachers who have blasted the government's intentions to scrap their 13th and 14th paycheques. But they said some of the planned revenues were theoretical, in particular Kc 3.8bn from mobile operators for UMTS licenses where no payment deal has yet been struck.
Minister of Finance, Bohuslav Sobotka, did a complete turnaround, saying the extra revenues would not go to expenditures but toward servicing the country's debts, or into investments.
The reforms were on track to be debated in the lower house in late September. The Civic Democrats (ODS) and some economists say the reforms don't go far enough while the unions say they go too far. It seemed all CSSD MPs had come on board early this summer, until Hojdar jumped ship in late July, robbing the government of its slim majority and threatening to destroy the reforms if they were not softened.

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FOREIGN INVESTMENT

Japanese leaders discuss investment in Czech Republic


Japanese business leaders and Prime Minister Junichiro Koizumi have discussed plans to use the Czech Republic as a manufacturing gateway to markets in the European Union and Eastern Europe. Top officials from Toyota Motors, Panasonic, Showa Aluminium and other companies met Koizumi at a Prague hotel as the prime minister concluded a week-long European tour that included earlier stops in Berlin and Warsaw. On a per capita basis, the Czech Republic is the leading European country for Japanese investment. 
Japanese companies invested US$4.1bn in Czech operations in the first quarter of 2003 alone. After talks with Czech Prime Minister Vladimir Spidla, Koizumi told reporters that Japanese companies would rely on operations in the Czech Republic and neighbouring Poland to access Western Europe after the tow countries join the European Union next spring. He said his European tour "was very meaningful, especially the visits to Poland and the Czech Republic. We feel we can invest in these two countries since they are joining the EU."

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MINERALS & METALS

Embargo imposed on diamond exports to Czech Republic


Starting on 1st September, the Czech Republic is on the list of countries into which it is forbidden to export diamonds, Mlada fronta Dnes has reported. 
The Czech Republic has been barred from the so-called Kimberley Process, that is, the community of states authorized to trade in diamonds. The reason is that the state has failed to pass in time a law that would permit greater control and supervision over trade in diamonds. 
Although the halting of trade in precious stones will have no tragic impact on the domestic economy, the absence of supervision will tarnish its image. "This inclusion among embargoed countries is devastating morally. Diamonds are used to launder money and to finance terrorist organizations," Michal Koselja, chief of the Czech Gemology Association, points out. 
Diamonds are popular among criminal organizations because of their high value and because they are easy to transport. Trade in them outside banks is thus hard to supervise. The new rules were to limit the use of diamonds for illegal transactions. "To be able to rejoin the Kimberley Process it is necessary, for example, to certify all stocks in the Czech Republic," says Koselja, according to whom a plenty of diamonds are in the country illegally. 
The Ministry of Finance is working on putting an end to the state of anarchy. It is to submit the missing law to the government in a matter of weeks. In the event of its fast approval by parliament, the present situation thus need not even have an adverse impact on firms that depend on diamonds.

 

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