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CZECH REPUBLIC

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Area (sq.km) 
78,866

Population 
10,249,216 

Density 
(per sq.km) 
132.2

Capital 
Prague 

Currency 
Koruna 

President 
Vaclav Klaus

Private sector 
% of GDP 
80%

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CNN.COM ELECTION WATCH

Update No: 089 - (30/09/04)

Czech Social Democrats get poll boost
The ruling Social Democrats in the Czech Republic have gained in opinion polls since the accession of Prime Minister Stanislav Gross. He is a populist, down-to-earth politician with wide appeal. 
An opinion poll by the STEM agency quoted in September 24th's edition of the Mlada Fronta Dnes newspaper suggested the Social Democrats had the support of 16.3 percent of voters in September compared with 13.6 percent in a similar poll taken by the same agency in July. The poll put the Social Democrats in second place, overtaking the largely unreformed Communist Party, whose support dropped to 15.5 percent from 19.1 percent.
The rightist opposition Civic Democrats continued to hold a strong lead taking 31.6 percent. The only other party to cross the 5 percent threshold necessary for parliamentary representation was the Christian Democrat Party, which took 7.6 percent. The Freedom Union had the support of just 1.1 percent of voters, the poll suggested.
Gross formally replaced Vladimir Spidla as prime minister in August. Spidla was ousted by his own party after a disastrous showing in elections to the European Parliament in June.
The poll was conducted among a representative sample of 1,732 adults between September 1 and 10.

Economy on the mend
The economic statistics are looking up after a poor year or two recently. This is doubtless because so is the rest of the EU, of which the Czechs are now proud members. 
Czech GDP grew by only 2.9% in 2004, not so brilliant for a transition economy. It is now rising by 4.0%, a more healthy record.
There is one thing going for it, a big amount of FDI, which at $37bn is second only to Poland's more than $40bn, in the former communist world. 

Telecoms a problem sector
Nevertheless, there is one sector foreign firms are avoiding, telecoms. This might seem an anomaly since elsewhere it has been a massive growth industry. 
The problem is that the government wants to sell the nation's phone operator, Cesky Telecom, as one unit, both its land-line and mobile arms. Foreign firms are very interested in the mobile side of the market, but not the land-line one. Vodafone, for instance, has moved out of it altogether. 
Finding a suitable buyer will require more than Gross sitting around waiting for change. By insisting on an all-or-nothing package he risks getting nothing.
This could have serious consequences for the whole economy. The fact is that if the Czech Republic is to convincingly stake its claim to being a modern European state, it needs a well-functioning and state-of-the-art telecom infrastructure, as well as a competitive communications market. 
Take the example of broadband Internet. This is the technology that allows the transfer of large amounts of information at high speed. Politicians across the civilized world agree that broadband is a very good thing indeed. Widespread access to information has benefits for commerce, education and many other aspects of our lives. 
So where is the Czech Republic on broadband? Well, it has about 82,000 people wired up. From a population of 10 million, that's a pretty pathetic 0.82 percent. Compare that with the UK, where there are more than 3 million broadband users from a population of about 60 million, more than 5 percent. 
Both countries obviously have some way to go to achieve the goal of genuinely widespread access, but the Czech Republic really is lagging a long way behind. So you can begin to see why Czech politicians from across the party spectrum have always seen the importance of doing something about Cesky Telecom. For many, selling the company to a big-name Western European telecom operator would be the ultimate economic achievement and a badge of respectability. But it doesn't look as if it is going to happen so easily.

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AVIATION

Ruzyne welcomes more passengers

Prague's international Ruzyne Airport transported 1.037m passengers in July 2004, up 27.4% year-on-year, Czech Airport Authority (CSL) spokeswoman, Anna Kovarikova, said, Interfax News Agency reported recently.
In January-July 2004 Ruzyne transported 5.255m passengers, an increase of 21% year-on-year. The number of passengers using Ruzyne as a transit airport has been stable, reaching 22% in July. A total of 14,000 aircraft arrived and departed from Ruzyne in July, an increase of 25.9% over July 2003. In the first 7 months of the year 78,846 aircraft arrived and departed from Ruzyne, up 22.2% year-on-year. The airport transported 4,083.8tn of freight in July, or 1.4% more than in the same period of 2003. Freight transport grew by 1.2% year-on-year to 29,003.3tn.

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CREDIT RATINGS

S&P assigns SAZKA BB- corporate credit rating

Standard & Poor's Ratings Services said on August 10th it assigned its BB- long-term corporate credit rating to the Czech Republic-based gaming company SAZKA as, New Europe reported. 
The outlook is stable. At the same time, Standard & Poor's assigned its BB- long-term rating to SAZKA's €175m (US$215m) senior secured bond maturing in 2014. The rating is the same as the corporate credit rating on the company, reflecting the senior secured position of the bond, which should allow it to rank ahead of unsecured claims in an event of insolvency.
"The ratings reflect SAZKA's aggressive financial leverage, after the company has funded the construction of SAZKA Arena - an 18,000 seat sports and entertainment complex in Prague," said Standard & Poor's credit analyst Anna Overton. "The ratings are supported, however, by the sustainable, cash-generative nature of SAZKA's well-established lottery business in the Czech Republic, where it is the market leader with a share of more than 80% of the lottery market," she added.
The SAZKA Arena is now fully operational and is expected to reach an operating break-even level within the next 12 months. Nevertheless, in the absence of an operating track record from the arena, rating assumptions do not rely on the arena's operating cash flows being available to service the €175m amortising bond. Standard & Poor's will assign a recovery rating in accordance with its normal practice, once the security charge over the arena has been formalised. SAZKA is expected to continue to benefit from its stable and mature lottery business, and remain committed to reducing its financial leverage progressively through the amortising bond structure. The operations of SAZKA Arena are expected to be self-funding from 2005 onward, as outlined in SAZKA Arena's business plan.

S&P raises ratings of 3 Czech banks

The rating agency Standard & Poor's has raised its long-term counterparty credit and certificate of deposit ratings on three Czech banks, the group said in a recent statement, New Europe reported.
The agency's ratings for the CSOB bank, Ceska Sporitelna (CS), and Komercni Banka (KB) were upped to BBB+ from BBB. At the same time, the A-2 short-term counterparty credit and certificate of deposit ratings were affirmed. The outlook on all three banks is stable, according to the agency. "The rating upgrades reflect the continuing improvement in the creditworthiness of all three institutions as they benefit from both the strengthening Czech economy and stabilising financial profiles," said S&P analyst John Gibling. "Restructuring, modernisation, and the state-sponsored historic problematic loan portfolio programmes have enabled the banks to achieve good levels of capitalisation, liquidity, and asset quality, and improve their competitiveness," according to Gibbling.
"The stable outlook on all three banks reflects the expectation that the banks will maintain their current creditworthiness and build a sustainable good track record as the banking sector matures." Each bank controls roughly 20% of the Czech market. The three banks are majority owned by foreign strategic investors. CSOB is part of the Belgian banking and insurance group KBC. KB is controlled by French banking group Societe Generale and CS is owned by Austria's Erste Bank.

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ENERGY

Unipetrol consolidated profit tops 1bn crowns in H1

Petrochemical group Unipetrol saw its consolidated profit rise to 1.14bn Czech crowns to Czech accounting standards (CSA) in the first half of this year, up from 727.3m crowns in the same period last year, Unipetrol spokesman, Tomas Zikmund, said, Interfax News Agency reported on August 5th. 
The group's total sales topped 34bn crowns, with sales its own products and services amounting to nearly 30bn crowns, while sale from other goods reached 4.1bn crowns.
Unipetrol group's total assets reached 72.6bn crowns at end-June. The results of the Unipetrol group reflect the development of economic indicators at all of the group's main subsidiaries, Zikmund was quoted as saying. Most of the holding company's major subsidiaries - Ceska rafinerska, Chemopetrol, Kaucuk, Paramo, Spolana and Unipetrol Rafinerie - all showed a profit in the first half of 2004.
Filling station operator Benzina's loss, however, grew to 262m crowns. Chemopetrol posted the biggest profit among the group, grossing 651bn crowns, more than trebling last year's figure. Ceska rafinerska showed a gross profit of 231bn crowns, a decline of over 30% year-on-year. Kaucuk, Paramo and Unipetrol Rafinerie each posted a profit of over 100bn crowns. Spolana Neratovice showed a profit of over 50bn crowns.
Unipetrol is majority-owned by the state. The government decided in April, however, to sell its 63% stake to the Polish oil giant PKN Orlen for 13.05bn crowns. The transaction must still be approved by the Czech Anti-Monopoly Office (UOHS) and the European Commission (EC).

CEZ, HNBP sign preliminary deal

The Czech power utility CEZ on August 11th signed a preliminary agreement on cooperation with the Slovak brown-coal mining firm Hornonitrianske bane Prievidza (HNBP), New Europe reported. 
The agreement is key to future developments in the Hornonitriansky mining region should CEZ acquire a state-owned stake in the Slovak national power utility Slovenske elekrarne (SE). CEZ has bid for the SE stake in a tender now being conducted by the Slovak cabinet. CEZ Director General Martin Roman said the agreement shows CEZ's "earnest" interest in the SE privatisation and its intention to participate in the development of the Slovak energy sector.

CEZ powers into foreign fields

CEZ, the Czech power generator, is stepping up its ambitious foreign expansion programme to become one of the big players in central and eastern Europe rather than pausing to integrate its recent domestic distribution acquisitions, the Financial Times reported recently.
"If we want to continue to deliver return on capital to our shareholders, we have to grow," says Martin Roman, the state-owned group's new chief executive.
"Now is exactly the right time to grow," he added. "In the next two years more will be for sale (in central and eastern Europe) than in the whole of the last 10 year."
Governments are splitting the privatisation of electricity into more manageable chunks, which suits CEZ. 
Moreover, some traditional bidders - such as EdF of France and RWE of Germany - are temporarily out of the game and, post-Enron, energy calculations have come to snap up some bargains.
"We are in a fabulous position to succeed," Mr Roman said. "It would be a sin to our shareholders not to participate." This is echoed in the company's strong share price performance this year.
CEZ recently won the tender for three distribution companies in Bulgaria, for which it offered €281.5m (£190m), increasing its customers from 3.4m to 5.3m.
It is one of three bidders in the final stage of the privatisation of Slovenske Elektrarne in Slovakia, which would add 7GW capacity to its existing 12GW.
Most recently, in Romania, it has qualified in the tender for two distribution companies. CEZ is looking at nine countries in the region, principally its neighbours in the Balkans. "There is so much for sale, even if we win only one-third we will be happy," Mr Roman said.
He sees Bulgaria, Romania and the former Yugoslavia as attractive because of their huge potential economic growth and their long-term shortage of power.
Mr Roman said that CEZ has a natural advantage here compared with its western European rivals: there is no language barrier and the power technology are similar.
Mr Roman says CEZ can finance its acquisitions easily as it has a lower level of debt and a similar credit rating to the international players. In June it issued €400m in bonds, some of the proceeds of which will be used for acquisitions.
"Even if we spend 3bn, we would still be the company with the lowest level of debt among the big players," he said.
CEZ is also cash-rich from its dominant domestic position and healthy exports - last year it was the second biggest power exporter in Europe. This year exports have fallen because of interconnection restrictions to Germany, but this has been more than compensated for by higher prices.
Mr Roman said that CEZ is the most profitable electricity company in Europe in terms of returns on sales, generating about €1bn in cash every year.
But this does not mean that CEZ will overpay for its foreign acquisitions.
"We will never pay premiums for acquisitions," Mr Roman said, pointing out that CEZ won in Bulgaria by bidding €20m lower than a competitor.
Nevertheless, CEZ can afford to make strong bids for neighbouring energy assets such as Slovenske Elektrarne as it expects the synergies to be higher.
Mr Roman admits that such an ambitious acquisitions programme is bound to delay another attempt to fully privatise CEZ, which is still 67% state-owned.
"The owner can get more money when the consolidation process is ready, he said, but added: "With every acquisition we are more and more attractive.

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FOREIGN LOANS

EU offers 100m euro in support

The European Union Commission has transferred five deposit payments worth €104,44m to the finance ministry for programmes co-financed by EU funds, Finance Ministry spokesman, Radek Zeman, said, Interfax News Agency reported on August 4th. 
Commission approval is required before any money from the EU budget can be transferred. To date, the Commission had already approved eight out of a total of nine programmes. In the coming days, the finance ministry expects to receive a transfer of funds for another three approved programmes - agriculture, human resource development and the equal initiative, said the spokesman. The volume of payments this year will amount to 10% of the total allocation for individual programmes in the period 2004-2006. Next year the Czech Republic will receive the second part of the deposit payment, or 6% of the total allocation. All these funds will be used to finance the first projects co-financed by the European Union, Zeman said.

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MINERALS & METALS

Severstal eyes Vitkovice Steel

Russian steel group Severstal has expressed an interest in the Czech Republic's Vitkovice Steel (VS), Severstal Group spokeswoman, Lada Astikas, said, Interfax News Agency reported.
Severstal is waiting for the Czech government to call a tender for the sale of its majority stake in VS. Finance Ministry spokesman, Marek Zeman, said the privatisation plan is ready but has yet to be approved by cabinet. Astikas says after the government presents its general conditions, Severstal will make its final decision on participating in the tender. She said it was too early to comment on the possible size of Severstal's bid.

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TELECOMMUNICATIONS

Aliatel reports positive first-half results

Alternative telecommunications operator Aliatel saw revenues from sales of its own services grow 22.5% to 1.49 Czech crowns in the first half of 2004, the company has announced. Thanks to its positive first-half results, Aliatel has confirmed its leading position among alternative operators in terms of revenues. Earnings before interest, taxation, depreciation, and amortisation (EBITDA) amounted to 139m crowns in the monitored period. The company's cumulative loss has been declining steadily, amounting to only 158m crowns in January-June 2004, or 29% less than during the same period last year. Investments totalled 74m crowns in the first half 2004, down 58% year-on-year. 
In July 2004 Aliatel shareholders unanimously approved a debt-equity swap, which resulted in a capital hike of 2.2bn crowns to 5.47bn crowns. Aliatel is controlled by the regional power utilities Severomoravska energetika (12.53%), Jihoceska energetika, Jihomoravska energetika, and Zapadoceska energetika (each 11.66%), New Europe reported recently.

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