CZECH REPUBLIC

NEWS REPORT
 
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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: 076 - (28/08/03)

Economic blues
The Czech Republic has had a difficult time of late. Despite more than US$8bn in foreign investment in 2002, the Czech Republic ran an equivalent deficit of 7.3% of GDP in the same year. 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. State spending is over 50% of GDP and the budget deficit is expected to be over 7% again of GDP in 2003. 
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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AGRICULTURE

Farmer seek home-grown solutions

Even after the biggest ever shake-up of European agriculture with the reform of the European Union's Common Agricultural Policy (CAP), Czech farmers face far more pressing home-grown problems than those from aboard, the Prague Business Journal reports.
CAP reform will have a less immediate impact on Czechs than the billions of crowns that could be cut from the Ministry of Agriculture's budget if Minister of Finance, Bohuslav Sobotka, gets his way.
Sobotka is proposing that compensation to farmers for the lower direct payments they will receive on entry into the EU than their EU counterparts, be cut to Kc 12.2 billion. That's Kc 5.4bn less than demanded by the Ministry of Agriculture. Direct payments to Czech farmers from EU funds for 2004, 2005 and 2006 were fixed at 25, 30 and 35 per cent, respectively, of the amount paid to existing EU members. The EU allows the Czech government to kick in its own contribution from the state budget to top up the compensation to 55, 60 and 65 per cent.
The Ministry of Agriculture and farmers organisations want payment of the maximum possible amount. They say that without the highest subsidy, farmers will be unable to compete.
At the same time, the Minister of Agriculture, Jaroslav Palas, is pressing the government for an extra Kc 4.1bn to help compensate farmers for past losses due to bad weather. The Cabinet still must decide on the proposal which was made in June. Agriculture chamber president, Vaclav Hlavacek, said farmers last year lost around Kc 2.5bn and that immediate state support is required. "Besides advance payments for this year's subsidies, it is necessary to look for additional money to solve the crisis," he said. Last year farmers were hit by a drop in purchase prices, the August floods and a worse than expected harvest, Hlavacek said. Farmers demonstrated in major cities at the start of June to reinforce their claims for immediate help.
The final decision of the overall level of support for farmers will be taken in later August or early September when the Cabinet has cleared the Ministry of Finance to cut overall spending by ministries by Kc 20.7bn, but where the cuts will be made has not been finalised.
EU farm ministers decided on June 26th on a radical 10-year reform of the current subsidy system by cutting the automatic link between what farmers produce and the subsidies.
Candidate countries have a choice of accepting the regime after it takes effect or sticking to the conditions agreed at least year's Copenhagen summit until 2013.

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BANKING

New players eye mortgage market

Three banks operating on the Czech market - eBanka, Volksbank and ING - plan to join the country's small but dynamic mortgage market within the next year. This would heighten competition but could pose a real challenge for the newcomers, who will be taking on eight banks that have been offering mortgages for up to eight years, Prague Business Journal has reported.
Mortgages account for just over 8 per cent of all retail segment loans. At the end of 2002, the volume of mortgage loans offered in the Czech Republic reached Kc74bn (US$2.7bn), a 31 per cent increase on the figure for 2001. But fewer than 20,000 mortgages were offered in the Czech Republic in 2002 (or one per 510 people), compared to 1.4 million in Great Britain (one per 40 people). This, observers and mortgage providers say, leaves huge room for growth over the next few decades, and it's this potential growth the new players are looking to cash in on.
Volksbank is preparing a mortgage programme, said Blanka Kandrnalova, of the bank's marketing department, but has not yet set a date for when it wants to launch it. In the meantime, she added, Volksbank offers property financing products, which can also be used for housing.
In the case of eBanka, the bank submitted a second application for a mortgage licence to the Czech National Bank (CNB) at the start of this year (the first was submitted by the bank's previous management last year and was subsequently reworked by the new management).
"We are not sure at this point how long it will take the CNB to decide on issuing a licence, but as soon as we get the clearance we're ready to start offering mortgages straight away," said eBanka spokesman, Pavel Makovsky.
ING has so far lost out on a mortgage licence, said spokeswoman Jana Burdova, as the CNB rejected a licence application filed in May 2002. The application was rejected because ING's operations in the Czech Republic are merely a branch of the Dutch-based bank, and without a local licence the bank cannot provide mortgages. But this will change post-EU accession, Durdova added, as banks will be able to provide cross-border services within the EU without a local licence.
"It's quite logical that these banks want to get in on the action," said Jan Hajek, a banking analyst at Patria Finance. "The market has been growing dynamically, and unless interest rates go up dramatically it will continue to do so. This will increase competition, which will bring consumers greater choice and options."
But some bankers already in the mortgage business maintain the news players may have missed the boat.
"Most of the big players have been offering mortgages for years, and I don't see how these new players will be able to catch up," said Jan Sadil, a board members at Ceskomoravska Hypotecni Banka (CMHB), which has provided the most mortgage loans on the Czech market so far. "To survive in the long run all the players need to gain critical mass, and I think that by the time these new players get up and running, it will be too late."

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ENERGY

Czech brown-coal assets to be sold off

The Czech government plans to privatise the country's brown-coal mines through a tender designed to exclude most foreign bidders, the Financial Times reported on July 28th.
The cabinet should agree shortly to launch the sale of the state's majority-making Severoceske Doly and Sokolovska Uhelna mines with tough conditions that favour domestic contenders. Bidders will have to have experience of brown-coal mining but must not operate mines in neighbouring countries or own competing energy sources such as gas. They will also have to submit a business plan showing how they intend to maintain output and jobs.
"We don't want to sell the companies to a competitor," said Martin Pecina, deputy industry minister. "It will not be a coal producer from a neighbour like Germany, which would import coal from Germany."
The ruling Social Democrats are sensitive to the fate of the brown-coal mines because the North Bohemian mining region has the highest unemployment in the country and the party is losing ground there to the Communists. Employment in the brown-coal mines, which last year produced 49m tonnes, has halved to 20,000 since 1990.
The restrictions, if accepted by the cabinet, would limit the bidders to private domestic mining companies and further-flung foreign companies that would have little obvious interest in entering the Czech market.
Appian Group, the financial group that owns Mostecka Uhelna, the only private brown coal mine, is the clear favourite to buy the state's 55.4% stake in neighbouring Severoceske Doly. Apian offered Kc2.57bn (US$92m) for Severoceske in the past and lobbied to buy it without tender.
The contest for the 50.1% stake in Sokolovska Uhelna is more open, with the company's power station attracting interest also from electricity companies.
Sokolovska's management is expected to bid, and Metalimex, owner of black-coal miner, OKD, and of one third of Sokolovska, had previously offered Kc1.8bn. Both are expected to pair with Czech or Slovak financial investors.
Of the foreign investors, Northland Power of Canada is said to be negotiating with Sokolovska's management, and International Power of the UK, which owns local power company EOP, has declared an interest.
In total, Mr Pecina said he expected three or four foreign bidders to take part, including perhaps Russian mining companies.
The ministry of industry hopes to complete the sales quickly, before the end of this year.

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FINANCIAL NEWS

Industrial prices show largest decline for the year

Industrial producer prices (PPI) fell 0.2% month-to-month and 0.9% year-to-year in June, according to the Czech Statistical Office (CSU), Interfax News Agency reported.This was the sharpest year-to-year decline so far in 2003. The PPI drop was driven mainly by falling oil prices. Prices of coke and refined petroleum products fell 4.4% month-to-month in June, by those of chemical products (-2.5%) and manufactured goods (-1.6%). In year-to-year terms, the PPI has been falling since February 2002. Prices of coke and refined petroleum products have slipped 5.8% year-to-year. Food prices were down 2.0% year-to-year.
After a two-month growth period, agricultural producer prices fell 1.0% month-to-month, due to lower prices for animal products. Crop prices grew 3.9%. Construction prices rose again - by 0.2% - in June. Prices of construction material inputs fell 0.2% month-to-month. Prices of construction work rose 2.2% construction material input prices fell 1.7% year-to-year.
"The data sends a similar signal as that sent by the recently published inflation data for June," said Radomir Jac of Commerzbank Capital Markets. "They confirm an absence of inflationary pressures in the Czech economy. Furthermore, May export/import prices point to an absence of inflationary pressures that could be imported from abroad."
Jac does not expect any significant upward pressure on industrial PPI in the coming months. Most analysts believe the Czech National Bank (CNB) will cut interest rates again before the year's end thanks to an absence of inflationary pressures in the economy.

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FOREIGN ECONOMIC RELATIONS

Skoda Energo advances in India with 50m crown contract

Skoda Energo, a member of the engineering holding Skoda Holding, secured a 50 million Czech crown agreement in India for the supply of a 25 MW turbine to Triveni, an India-based company, by next July, Interfax News Agency quoted Skoda Holding spokesman, Karel Samec, as saying.
"The turbine to be supplied by Skoda Energo to India will employ new technology involving the processing of renewable resources, in this case biomass," Samec said. Under the agreement, an option to supply two more biomass-processing turbines of the same capacity to India in the future exists, he added.
Skoda Energo began production of biomass turbine technology a number of years ago. At present, three Skoda Energo turbines are active in Switzerland. The Czech company would like to clinch two other major deals in India, with a combined value of 4.5bn crowns. Skoda Energo has supplied power-generating equipment with a capacity of 6,000 MW to India so far. For the next decade, the group would like to offer equipment with a total capacity of another 100,000 MW, the company spokesman said.
Skoda Energo recorded a 245m crown profit last year, while sales totalled 1.6bn crowns. Exports accounted for more than two thirds of overall sales. In 2002, Skoda Energo made every effort to clinch orders for the next two years, valued at 4.85bn crowns. The new deals helped Skoda Energo strengthen its presence in foreign markets, like Italy, Japan and the United States. 

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FOREIGN INVESTMENT

Cardboard firms box clever

The humble cardboard box is attracting foreign investment to the Czech Republic, Prague Business Journal has reported.
The nation's consumption and production of corrugated cardboard have climbed markedly in recent years, but exports say there's plenty of potential for future growth.
"The Czech Republic still lags behind developed European states in using corrugated cardboard for packaging," said Radovan Wicha, chairman of the Association of Producers of Corrugated Cardboard Packaging. The country's production output lags behind other European countries. For example, Italy, Spain and Belgium each produce about 60 kilograms of corrugated packaging per person every year, compared with only about 22 kilograms in the Czech Republic.
That's why foreign companies, which already control the country's cardboard business, are planning to increase their investments.
The largest domestic producers of corrugated cardboard packages are Duropack Bupak Obaly, part of the Austrian group Duropack; Kappa Packaging Czech, owned by the Netherlands's Kappa Packaging B.V., and Model Obaly, which is 100 per cent controlled by the Swiss company, Model-Holding AG.
Kappa wants to expand its production and invest at least Kc350m to build a new plant in an industrial zone in Olomouc. "If it implements the plant, up to 250 people would find a job in the new facility," said Olomouc deputy mayor, Jaromir Czmero.
In the first instance, the new Kappa facility would create about 120 jobs, Czmereo added. The plant could open next summer. 
Jiri Dolezel of Olomouc's economic development department said the company agreed to invest more than Kc 350m to qualify for government incentives. Kappa's Czech subsidiary posted a Kc 165m profit on sales of Kc 1.6bn last year.
Kappa's Dutch investor already operates a smaller paper-making facility in Olomouc and decided to expand cardboard production to meet growing demand, said Czmero. The company, one of Europe's largest paper companies, currently operates four plants across the Czech Republic.
It is also planning an expansion at its facility in Slovakia. The Slovak subsidiary, Kappa Sturovo, plans to invest nearly 60m Euro for a plant modernisation aimed at increasing output. The goal is to boost corrugated cardboard production to 320,000 tonnes in 2007 - nearly twice last year's production said spokesman, Robert Kiss.
Across the Czech Republic, corrugated cardboard consumption last year climbed 6 per cent from 2001 to an all time high of 255,000 tonnes, said Wicha of the trade association.
"This development confirmed our estimates and expectations," he said. "The permanent growth in the consumption of corrugated cardboard in the last five years, expresses the market's recent inclination to recyclable packaging that comply with strict environmental standards," Czmero added.
Czech exports of corrugated cardboard rose to 27,00 tonnes, while the country imported an additional 1,000 tonnes. These numbers show that the Czech market is self-sufficient and balanced in terms of production and consumption of cardboard, the trade association said.

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INFORMATION TECHNOLOGY

Czech post office waiting for electronic registered mail to deliver customers and real-time profit

Almost six months after Ceska Posta started to offer companies the possibility to deliver registered mail electronically instead of by post, few businesses have taken advantage of the new service. Post office representatives, however, still see a great potential for the innovative service, which was developed in-house, the Prague Business Journal has reported.
According to Antonin Ambroz, the post office's project chief, so far only two companies, have signed up for the service, Pojistovna Ministerstva Vnitra and Hutnicka Zamestnanecka Pojistovna, both of which are health insurers.
They use the electronic registered mail, or REP, as the post office calls it, to exchange data with hospitals and other health care facilities. Previously they sent floppy disks or CDs via the regular mail.
Stanislav Blahut of Hutnicka Zamestnanecka Pojistovna, said that the insurer had only "just received the offer" from Ceska Posta to use REP and was still deciding whether to take it up. He said he favoured testing the service but that the final decision was not his to make.
In any case, Ceska Posta is not making any money from the service just yet as Pojistovna Ministerstva Vnitra has signed on for a free trial that lasts until the end of the year. Ambroz said that the post office would get its first income from the REP service only in the second half of 2004. some private companies were interested in the product, he said, but declined to specify which ones.

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TRANSPORT

Skanska-Strabag consortium targets D47 high construction work

Construction company, Skanska CZ, should start work this year on three high contracts valued at more than Kc 2bn (61.9 m Euro) and together with Strabag is competing for a Kc 5.5bn contract to build part of the delayed D47 highway, the Prague Business Journal has reported.
Skanska's road construction division, Skanska DS was awarded contracts for work on three highway construction projects for the D11 between Prague and Hradec Kralove following public tenders organised by the state road and highways directorate, Reditelstvi Silnic a Dalnic (RSD).
The largest assignment is for the 11-kilometre section of the highway between Chyst-Osicky near Hradec Kralove. Skanska DS is leading the consortium consisting of construction companies Strabag and Silnice Hradec Kralove. The total value of the contract is almost Kc 2.3bn, of which Skanska will get work valued at Kc 1.5bn.
The other contracts are for the construction of a highway bridge at Zizelice valued at Kc 443m and for a six kilometre section of the D11 highway between Dobsice-Chyst valued at Kc 776m.
Construction work on these parts of the D11 is likely to start this year, as RSD has already gained the land-use permits. But environmentalists and other interested parties could still block the constructions permits that RSD hopes to receive this year. The Cabinet could also decide to cut spending on construction of new highways as part of its public finance reform package.
Meanwhile, Skanska is also one of the hot candidates to win an estimated Kc 5.5bn tender for construction of the 6.5 kilometre Ostrava-Rudna-Hrusov section of the D47. The whole section is over 8.5 km long, but the first two kilometres have already been built by ODS-Dopravni Stavby Ostrava. It was selected to build this part of the road under the previous construction contract with Housing & Construction. The latest tender was launched at the beginning of June with a July 18th deadline for bids. Skanska DS participated in the tender in a consortium with Strabag. Its offer was the second highest, according to Skanska, but this should not affect its chances since price is not the only factor. RDS would not disclose the names of the individual bidders or consortia.
Now a special committee appointed by the Cabinet is considering the offers and is expected to announce a decision on them in late August or early September, Pavel Dolezal, the RDS deputy manager for the D47 project said. He pointed out that many construction companies have grouped together in consortia because of the size of the workload. Another candidate for the work on the D47 contracts is ODS-Dopravni Stavby Ostrava. Construction of this part of the D47 should start in November.

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