Czech Republic

Originally published: Jan-11-2005

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Government

Parliamentary democracy led by a coalition of the Czech Social Democrat Party, the Freedom Union and the Christian Democrats. The country has 13 regions and 1 capital city, Prague.

Legal System

Civil law system based on Austro-Hungarian codes; has not accepted compulsory ICJ (International Court of Justice) jurisdiction; legal code modified to bring it in line with Organization on Security and Cooperation in Europe (OSCE) obligations and to expunge Marxist-Leninist legal theory.

Economy

Currency: Koruna (crown) (CZK) - 23.085 CZK = 1 USD (1/10/2005)

Economic Indicators

(e) estimate (f) forecast

Leading Markets (2003): Germany 37.1%, Slovakia 8%, Austria 6.3%, UK 5.4%, Poland 4.8%, France 4.7%, Italy 4.5%, Netherlands 4.1%

Leading Exports: machinery and transport equipment, intermediate manufactures, chemicals, raw materials and fuel

Leading Suppliers (2003): Germany 32.6%, Italy 5.3%, China 5.2%, Slovakia 5.2%, France 4.9%, Russia 4.6%, Austria 4.3%, Poland 4.2%

Leading Imports: machinery and transport equipment, intermediate manufactures, raw materials and fuels, chemicals

Top Industries: motor vehicles, machinery, iron and steel, metalworking, chemicals, electronics, transportation equipment, textiles, glass, brewing, china ceramics, pharmaceuticals

General Economic Situation

The Czech Republic is one of the most stable and prosperous of the post-Communist states. It has a well-educated population, a well-developed infrastructure, and a strategic location in Europe. Its industrial plant and equipment, much of which dates from communist days and is obsolete, is rapidly being modernized through strong inflows of foreign direct investment.

Astute economic management since 1991 has led to the elimination of 95% of all price controls, large inflows of foreign investment, increasing domestic consumption and industrial production, and a stable exchange rate. The Czech koruna became fully convertible for most business purposes in 1995 and, since 1999 has been allowed to float. Foreign exchange reserves are at comfortable levels with a moderate foreign debt burden.

While more than 80% of output is produced by the private sector, the government still holds majority or significant stakes in several large Czech enterprises, notably firms in the energy, transportation and communications sectors. The government’s role is evolving from owner to regulator in many of these sectors as privatization proceeds.

The Czech Republic became a member of the European Union on May 1, 2004. The process of accession had a positive impact on reform in the country, and implementation of EU directives and regulations continues. However, economic transformation is not complete. The government still faces serious challenges in completing industrial restructuring, increasing transparency in capital market transactions, covering the losses piled up by formerly state-owned banks, transforming the housing sector, reforming the pension and health care systems, and solving serious environmental problems. The public sector deficit has remained the economy’s main weakness.

Business Climate

The Czech government has offered investment incentives to enhance the country’s natural advantages and attract foreign partners. Shifting emphasis from the East to the West has necessitated adjustment of commercial laws and accounting practices to fit Western standards. Formerly state-owned banks have all been privatized into the hands of West European banks and oversight by the central bank has improved. The telecommunications infrastructure has been upgraded, and the country has made significant progress toward creating a stable and attractive investment climate.

Foreign business people, however, cite a convoluted, or in some cases corrupt, system of bureaucracy at both the national and local levels that is impeding market access. Potential investors must sometimes spend considerable time and effort to finalize a deal, or to enforce the terms of a contract. The government has been making some efforts to deal with this problem.

Bankruptcy procedures are cumbersome, often long and usually end up in liquidation, with asset stripping a common occurrence. New legislation is being introduced to strengthen the role of creditors and speed up proceedings.

Credit and Collections

• Collection Experience: Fair-Good
• Exchange Delays: 2 months
• Preferred Credit Terms: Unconfirmed Letter of Credit
• Minimum Credit Terms: Sight Draft

Payments: Bank transfers are the most widely used means of payment. Leading Czech banks are linked to the SWIFT system for handling domestic and international payments, along with CERTIS, a clearing interbank local payments system. Bills of exchange and checks are not widely used as they must be issued in accordance with certain criteria to be valid. For unpaid and protested bills of exchange, promissory notes and checks, creditors may access a fast-track procedure for ordering payment under which, if the judge admits the plaintiff’s application, the debtor has only three days in which to contest the order.

Debt collection: The Czech Republic has a cumbersome legal system, high costs for litigation and extremely slow court procedures. If possible, creditors should seek out-of-court settlements based on payment schedules, rather than initiating legal recovery proceedings.

Risk Assessment

Country Risk Rating: A2 - Default probability is still weak even in the case when one country’s political and economic environment or payment record of companies is not as good as in A1-rated countries.

The economy should continue to gain momentum in 2004 and 2005 with investment and foreign demand increasing. Although dissention within the government coalition, coupled with its sharp loss in popularity, has spurred fears of a slowdown in the pace of reforms, political risk has remained low. However, the risk of a crisis of confidence in the markets is appreciable, due to the country’s increased dependence on foreign capital, its widening public sector and current account deficits, and the increased volatility of financing.

Due to moderate growth in 2003, the Coface payment incident index has remained below the world average. The car industry, cosmetics, and household appliance sectors have been performing well, whereas agriculture, steel, textiles, and leather have continued to experience difficulties. Stronger growth in 2004 will not preclude occasional payment defaults in the weakest sectors.

Sources for further information on doing business in Brazil

(All the sites listed below provide information in English)

Czech.cz - Official site for the Ministry of Foreign Affairs of the Czech Republic: Packed with business, travel, and leisure information and links to databases of Czech companies.

Doing Business in the Czech Republic, provided by Ernst & Young - Extensive PDF documents covering topics like establishing a business, taxation, foreign exchange control, etc.

PriceWaterhouseCoopers Online Guide to the Czech Republic - Covers topics similar to Ernst & Young document (above). The documents are available in HTML by topic or as single download PDF.

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This information is provided by ABC-Amega Inc. Providing international receivable management and debt collection services for exporters to more than 200 countries including the Czech Republic. For further information, contact info@abc-amega.com.

This report represents a compilation of information from a wide variety of reputable sources including: the U.S. Commercial Service, CIA World Factbook, Federation of International Trade Associations, and Economist Country Briefings.

Risk Assessment information: Coface Country Rating.

Information on credit terms and the probability of prompt payment are provided, with permission, from Overseas Press and Consultants (OP&C) as published in IOMA's Report on "Managing Credit, Receivables & Collections," August 2004.