02-08-2001

Central Bank to hike interest rates

The Czech National Bank has decided to raise the key interest rates by quarter of a percentage point as of Friday, June 27. The two-week repo rate rose to 5.25 percent, the discount rate to 4.25, and the Lombard rate to 6.25 percent. Economic analysts hadn't expected this move until late in August. The last time the Czech National Bank changed interest rates was in February of this year when it cut all three rates considerably.

The increase in interest rates is not very high and economic experts do not expect it to have a significant effect on the economy, however, it might be seen rather as a warning. Jan Slaby is an economic analyst with Wood & Company stockbrokers.

Since 1998, when the Czech National Bank introduced inflation targeting, it has never managed to hit the mark and usually undershoots the target range. This year, the net inflation target is set between 2 and 4 percent. Mr Slaby thinks that this year again, the Central Bank will miss it.

Study: EU accession to increase production costs

According to a government study on the social and economic impact of EU accession, the full harmonisation of labour relations, social protection and environmental protection with EU standards is likely to result in an increase in production costs in Czech industry. At the same time, meeting the standards will require an increase in public spending of up to 6 percent.

Czech Telecom to acquire Eurotel

The dominant Czech telecommunications operator, Czech Telecom, is to fully acquire the leading Czech mobile operator, Eurotel, in a move expected to significantly boost Telecom's value ahead of its planned privatisation.

Telecom already owns 51 percent of Eurotel and will buy the remaining 49 percent stake from the U.S.-based Verizon Telecommunications and AT&T for around 1.5 billion USD. Czech Telecom representatives said the company was seeking a syndicated loan to finance the deal.

Eurotel is the largest of the three Czech mobile phone operators. with more than 2.6 million users at the end of June. Eurotel controls half the Czech market, which is considered the most dynamically developing mobile market in Central and Eastern Europe.

On Wednesday, Eurotel reported a 40-percent increase in net profits year-on-year in the first half of 2001.

The acquisition of Eurotel is expected to give Czech Telecom a major value boost before its privatisation, planned for the end of this year. The Czech government would thus be able to get more than it hoped for its majority stake. The Czech National Property Fund expected to sell Czech Telecom for 2 billion USD. After the acquisition of Eurotel, the Czech ministry of transport and communications believes that Czech Telecom could sell for around 2.5 billion.

One of the hottest candidates is Deutsche Telekom. However, Deutsche Telekom already controls the second largest Czech mobile operator, RadioMobil, and would have to sell-off either RadioMobil or Eurotel so as not to infringe upon anti-monopoly regulations.

India pondering purchase of Czech L-159 trainer jets

India's defence ministry is considering the Czech-made Aero L-159 sub-sonic trainer jet as one of the options available for equipping its air force with training aircraft. The L-159 will have to compete with four other bidders. The Indian Air Force is in desperate need of trainer jets as it wishes to improve the flying skills of its pilots, many of whom now go straight from basic aircraft to flying Russian MiG-21 jet fighters. The air force has a woeful accident record and has lost more than 200 jets since 1991, mostly Russian-made MiGs.

2002 state budget in jeopardy

The Czech government approved the draft state budget for 2002 at the end of last week. Budget revenues should reach 690 billion CZK and expenditures 744 billion. The deficit including losses of the state's Consolidation Bank amount to 54 billion. Without these losses, the deficit is 10 billion Czech crowns which is in line with political agreements between the minority ruling Social Democrats and the senior opposition Civic Democrats.

Almost a third of the budget will go to the ministry of labour and social affairs to cover old-age pensions as well as unemployment benefits and other social welfare payments.

Just hours after the outline of the budget was released to the public, economic experts and opposition politicians alike expressed doubt as to the viability of the proposal. Finance Minister Jiri Rusnok himself predicts that the opposition will reject the government's draft and the government will have to operate on a provisional budget for the first several weeks or even months of next year.

The main objection to the draft state budget is that the government has most likely overestimated the revenue side. Another problem is that the government has included proceeds from privatisation and other uncertain incomes in the budget revenues. Economic analyst Jan Slaby:

A heated debate around the structure and volume of budget revenues is expected in parliament. Mr Rusnok said he would prefer cutting both revenues and expenditures, however, he believes that such a move will meet with opposition from some members of the cabinet who would prefer to opt for a provisional budget.

There is a general consensus that there is an unsustainable imbalance in the structure of the state budget and that there is a need for reform, a fact recognised even by the government. Mr Slaby again:

The need for reform in public spending has been acknowledged by politicians for years, however, no Czech government - whether conservative or socialist - have found the courage to make the necessary painful cuts in state expenditure. The deputy leader of the opposition Communist Party of Bohemia and Moravia, economist Miroslav Ransdorf, doubts that the minority Social Democratic government will be the first to implement the reforms, especially with the next general elections due to take place in 2002.
So, what are the necessary reforms everyone is talking about? Mr Slaby:
Meanwhile, some Czech media have reported that the finance ministry is considering borrowing money abroad to pay off the growing debts. Finance Minister Jiri Rusnok has indeed admitted that his ministry has been analysing options for issuing international bonds before the end of this year.

02-08-2001