| ||||||||||||
| ||||||||||||
| ||||||||||||
| ||||||||||||
Country Commercial Guides
FY 2000: Czech Republic
CHAPTER II: ECONOMIC TRENDS AND OUTLOOK
A. Major Trends and Outlook
The Czech Republic has largely transformed itself into a Western market economy, with more than 80% of enterprises in private hands. Following a very rapid initial transition, the Czech Republic is undergoing needed economic retrenchment after high but unsustainable levels of growth in 1995 and 1996. The economy contracted by nearly 3% in 1998 and is expected to decline slightly in 1999. According to the Czech Statistical Office (CSO), a return to growth should come in 2000. Inflation is expected to be less than 5% in 1999, while unemployment measured 8.4% at the end of the second quarter of 1999 and is anticipated to rise further as necessary industrial restructuring continues. The lower than expected levels of inflation have allowed the Czech National Bank to lower interest rates repeatedly in 1999 in an effort to spark renewed growth.
The roots of the current decline lie with unfinished structural reforms. These include bank privatization, judicial reform, enforceable bankruptcy laws, improved capital markets regulation and increased transparency in transactions and decision-making, among others. The current Social Democratic government approved the privatization of the country's fourth largest bank, as well as a rapid timetable for privatization of the country's two largest banks in an important signal of its commitment to move forward with bank privatization. The Zeman government has announced plans to tackle many of the remaining structural reform issues; however, a lack of governing experience and its position as a minority government have acted as a drag on its ability to rapidly introduce a comprehensive economic reform agenda.
Integrating the Czech economy into the West, specifically into the EU, remains a government priority. The Czech Republic began negotiations on EU accession in March 1998 and has set itself a target date of 2003 to be prepared for EU entry. In the meantime, the Czech Republic benefits from access to EU markets under an Association Agreement with the EU. Harmonization of Czech laws and standards with those of the EU continues as the country works toward eventual EU membership.
B. Principal Growth Sectors
Foreign investment has played a major role in the development of the Czech economy by providing both management experience and capital needed to restructure Czech firms. While foreign capital flows from European Union countries are considerable, the United States is the third largest investor in the Czech Republic, and U.S. firms stand to profit from the Republic's continued economic transformation.
Chief imports include communications equipment, specialized metalworking machinery, chemicals, and transport equipment. After a boom in imports of consumer goods in the first months of the 1997 (at least 6.2% growth in the first half of 1997), consumer demand cooled as a result of the recession and the depreciation of the crown.
Primary business opportunities are related to the redevelopment of basic infrastructure and restructuring of privatized firms. In addition, major upgrades of pollution control equipment, telecommunications equipment and services, energy production and distribution, housing/municipal infrastructure and medical services have been underway for several years. In June 1998, the interim government announced plans to privatize the energy sector. However, by the summer of 1999, plans for privatization cooled. Unprecedented July 1997 floods, which covered almost a third of the nation, severely damaged transportation, telecommunication, and energy networks as well as residential and commercial properties. Previously planned infrastructure upgrades as well as rebuilding efforts will consume a major portion of municipalities' investment monies. New investments in plants and equipment will also continue, particularly as restructuring gets underway in more companies. A thriving services sector, built up from almost nothing, has emerged as the structure of the economy has shifted toward services from industry and agriculture.
C. Government Role in the Economy
Although over 75% of output is produced by the private sector, the government, through the National Property Fund (NPF), holds majority or significant stakes in several large Czech enterprises, notably banks and firms in the energy, transportation and communications sectors.
The government budget measures 32% of GDP, with non-discretionary expenditures constituting nearly 60% of the overall budget. Until 1999, fiscal policy remained conservative, with budget deficits rising gradually in recent years. The 1999 budget broke with past fiscal conservatism, including a planned deficit target of 2% of GDP. As the current recession deepens and revenue forecasts decline, the final budget deficit will likely be significantly higher, with some estimates ranging well over 3% of GDP.
The government's role is still evolving from owner to regulator of major sectors of the economy. The government has established a securities and exchange commission to regulate capital markets, and independent regulatory agencies in the telecommunications and energy sectors will likely be established, as liberalization and privatization in those sectors continue.
D. Balance of Payments
Balance of payments improved significantly in 1998, following the austerity measures put in place after sharply rising trade deficits in 1995-1996. The 1998 account deficit measured approximately $1 billion, or 1.9% of GDP compared to 6.2 percent of GDP in 1997. The capital account finished 1998 with a $2.1 billion surplus. The trade account ended the year $2.5 billion deficit or 4.7% of GDP, a marked improvement over 1997, as exports increased faster than anticipated while the pace of increase in imports slowed. The trade deficit was partially offset by a $1.4 billion surplus in services and strong tourism receipts. Foreign investment measured $2.5 billion, a significant increase over the previous year, and strong FDI flows are expected to continue.
E. Infrastructure
Upgrading the nation's infrastructure, specifically telecommunications and transportation, is critical for continued economic growth and development. Although recognized as a priority, the massive nature of the rebuilding effort will require capital as well as time. Sharp cuts in government spending in 1997 and 1998 slowed infrastructure projects. However, accelerated privatization of remaining enterprises could encourage private investments in telecommunications, energy infrastructure, and transportation.
Resources to finance the country's extensive development plan for the telecommunications industry include major loans provided by the EBRD, European Investment Bank and both large local banks and foreign banks. The Dutch-Swiss consortium Telsource holds a 34.5% stake of the Czech telecommunication's monopoly, SPT Telecom, which is upgrading and expanding the telephone system. Cellular rates have fallen in the past year as two GSM standard cellular telephone networks have emerged (including one by a US West-Bell Atlantic joint venture with SPT, which also operates the existing analog network) in stiff competition for customers. In some under-served areas, private telephone companies have been allowed to provide basic telephone service, and a U.S. cable television joint venture has also been offering telephone connections along with TV service. Many of these ventures are positioning themselves for lifting of the SPT Telecom monopoly on basic telephony in 2000. The Czech Republic committed to lift this monopoly by December 31, 2000, as part of the WTO basic telecommunications agreement.
The need to overhaul the nation's transportation system is also recognized as a major priority. Unfortunately, state budget allocations have been inadequate, and the quality of Czech transport networks and systems, as well as rolling stock and vehicles, is generally below the standards of advanced European nations. All transport sectors, including railway, highway, inland waterway and air, have been targeted for infrastructure upgrade. Projects currently include a $3.5 billion modernization of the rail system, with priority on the Czech section of the important Berlin-Prague-Vienna Line; a plan to modernize and extend the country's highway network; and plans to develop the river transport system for intensive usage by the container hauling industry. With U.S. government assistance, the civilian air traffic control system is being integrated with military systems to provide more advanced methods of air traffic control. This will not only allow better utilization of airspace, but also improve the safety of air traffic. A new terminal at Prague's International Airport has opened, and plans are in the works for privatization and overhaul of several other smaller airports including Karlovy Vary, Brno and Ostrava.
[end of document]
Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.
