03-10-2002

A couple days ago Czech Prime Minister Vladimir Spidla called upon the Czech banking sector to do more to support the governments economic policy. Mr. Spidla made these comments after the parliament turned down a government proposal of a package of tax increases to pay for damages caused by Augusts floods.

Prime Minister Vladimir Spidla argued that the banks have an obligation to help the governments economic program because it was the government which bailed out the banks in the wake of a financial crisis which took place in the mid-1990s.

The last decade has proved to be anything but smooth sailing for banks and financial institutions in the Czech Republic. Many banks accumulated massive amounts of bad debt during the mid 1990s through shady lending practices which were partly due to a general lack of economic framework and partly to political meddling. Today, thanks to the Czech governments efforts in assuming this bad debt the financial sector in the Czech Republic is working quite well, all major banks have been privatized and competition between them is very good. Now that the largest banks are in foreign hands they do not have an obligation to support the government's economic plan. Also, one can not over look the fact that to do so would be to risk a similar situation which caused the initial financial crisis in the mid 1990's.

With interest rates already very low it is unclear what Mr. Spidla wants the banks to do to further the economic program of the government. We talked to David Marek who is the chief economist at the Patria Finance Company and asked him first if the Czech banking sector has any obligations towards the government.

Partly yes, as I can remember Erste bank currently owner of the major stake in Ceska Sporitelna obligated to provide some special loan programs in the Czech economy for small and medium size firms. But, this is something different that Mr. Spidla thought with his question for banks to help finance recovery of the Czech economy.

So why do you think the banks would be hesitant to provide these loans?

In the loan market in the Czech Republic it is necessary to distinguish two sectors. The first one, loans for households and foreign firms is working quite well and it is possible to obtain a loan from any bank in the Czech Republic. But there is the second sector, more important for the whole economy. The sector of loans for domestic firms and there is still a lack of confidence of Czech banks to the domestic industrial and service sector so its a question not of interest rate but a question in the confidence in banks.

Currently, the interest rate set by the Czech National Bank is 3 percent. How do the interest rates in the Czech Republic compare to other countries in Europe?

Currently interest rates in the Czech Republic are very low, its even lower then in the Eurozone and compared to other candidate countries its much more lower. Currently, possibilities to stimulate economic growth by low interests are enough in the Czech Republic. I would not expect the central bank to go on lowering interests rates in the same rate as we could see in the first half of this year. Problems are especially in external demand and from the point of view of the banks policy its lack of confidence to the domestic sector which is diminishing but still important.

Do you expect the banks to act on Prime Minister Spidlas recommendations?

I would say that the policy of Czech commercial banks is based on other factors then the wishes of Czech politicians in the Czech Republic, there is the policy of the Czech Central Bank and there is the question of competitiveness in the Czech market and these two questions are more important then the wishes of the Prime Minister.

In other economic news, the North Moravian town of Ostrava is to host the largest airplane repair facility in Central Europe. A 620 million CZK or 20 million USD investment contract has been signed and the construction of the largest aeroplane repair facility in Central Europe is to begin in December. The facility is to be located at the Ostrava-Mosnov airport, which has the longest runway in the Czech Republic. The repair facility, which will initially employ 40 people, was originally a part of an offset program of the British-Swedish consortium BAE Systems-Saab in the purchase agreement for supersonic jet fighters by the Czech government. However, due to the costs of the recent floods which hit the Czech Republic the government has reneged on its plans to purchase the jets because of a lack of funds. It was announced this week that a group of investors from Iceland and European Central Aviation have decided to go ahead with the project despite the cancellation of the jet purchase. The repair facility should be able to handle some 100 planes a year, and besides repairing Boeing 747 Jumbo Jets the facility will specialize in repairs of the newest transport plane, the Airbus A 380 which is currently under development. Within the next three years the company plans to expand to 250 employees.

The Privatization of one of the Czech Republics largest chemical firms Unipetrol faces setbacks. Unipetrol consists of six leading Czech chemical and refining firms, including infamous Spolana Neratovice which was to blame for a number of chlorine leaks into the Vltava river during Augusts floods. The state wants to sell its majority stake in the company which is now under the control of the National Property Fund. The winner of a public tender for the states 63-percent stake, Agrofert, a leading Czech firm in the agricultural and chemical industry, has failed to pay the required amount for the acquisition. Agrofert decided against the acquisition because the chemical industry has been affected by a recession since the signing of the purchase agreement. Unipetrol badly needs to find a strategic investor - something which may not be easy to achieve because the chemical industry not only finds itself in a difficult situation in the Czech Republic but also around the world.

The European Investment Bank has earmarked 1 billion Euros or around 30 billion Czech crowns in long-term low-interest loans. These funds will be available to not only the Czech Republic but also Germany, Austria, and Slovakia countries that were also affected by Augusts devastating floods. The European Investment Bank will provide an additional 4 billion euros in loans next year for regional flood repair. The bank said the repayment of the loans could be spread over 30 years with an initial grace period of seven years where no payments would be required.

The International Monetary Fund has lowered its estimate of Czech GDP growth for next year. The IMF changed its original estimate of 3.7 percent to 3.2 percent, slightly behind the 3.3-percent estimate for average GDP growth in EU candidate countries. David Marek of Patria Finance explains the main causes for the slowdown in the Czech economy.

There are three main reasons: the first one, the most important one, is sluggish external demand. We can see problems in the German economy and EU economy as a whole, thats the most important factor. The second important factor which will take place in the next several quarters will be the strong crown. Czech currency appreciated in the first half of this year and this appreciation was above the possibility of our economy. It is possible that we will see some negative impact on the Czech economy from the loss of competitiveness connected to the strong currency. The third reason is the slowdown in domestic demand. We can see that consumption expenditures of households as well as fixed investment creation are somewhat not so quickly rising as in previous quarters and years.

03-10-2002