The year 2004 in review

30-12-2004

This week on Business Report, we take a look back at some of the most important events of the year.

Well, the year 2004 started off with a whimper, and not a bang, as the management of the national rail operator, Ceske Drahy, announced plans in January to lay off over 6,000 employees. This prompted the railway unions to threaten massive strikes - mainly because they viewed the severance packages as paltry. Over the following months more money was found but the state-owned railways remain highly unprofitable.

On a more positive note, that month the Cabinet finally prepared its short-listed of bidders to take over the state's majority stake in Unipetrol, the oil and refinery group. Before too long, PKN Orlen from neighbouring Poland was named the winner, adding much needed revenues to the state coffers.

In February, the former monopoly Czech fixed-line operator Cesky Telecom, which lost about 70,000 clients the previous year as people began to rely solely on their mobile phones, began an aggressive campaign to win back clients, including offering faster and cheaper access to the Internet.

That month, a narrowing Czech trade gap and the continuing slide of the U.S. dollar led the local foreign exchange market to predict a stronger crown. They were right.

In March, the government decided to privatise two major coalmining companies and sold its majority stake in Sokolovska uhelna for 2.6 billion crowns to a company established for this purpose by the mining company's management. The government also announced it was selling its 46-percent stake in the North Moravian OKD black coal mine to its majority owner Karbon Invest for 2.25 billion crowns.

Meanwhile, the number of bankruptcies dropped off about 15 percent in the first quarter of 2003 over the previous year, and a nationwide poll two months ahead of European Union accession showed that most Czechs were highly unlikely to seek work abroad in the expanded EU, despite record high levels of unemployment — above 10 percent — at home.

In April, the Ministry of Finance revised its 2004 GDP growth forecast upwards, from 3.1 percent to 3.8 percent and predicted that in the foreseeable future, growth should continue to reflect the affects of EU accession. The big story in May, of course, was the Czechs accession to the EU — along with 9 other Central and Eastern European countries. Fears of major price hikes in basic goods like rice and sugar led to a run on the supermarkets, but proved ungrounded.

The value-added tax rate, however, changed in May for many goods and services, from 5 to 19 percent, but the rules for filing and penalties for non-compliance were far from clear, angering the business community.

Thanks to taking on unusually high "one-off" loan guarantees, the Czech Republic last year posted a 12.9 per cent budget deficit as a percentage of GDP -- the largest of any EU country. By May, the EU was officially questioning the Czechs deficit-to-GDP ratio and the country looked likely to adopt the single European currency in 2009 at the earliest.

Was this a cause for concern? Not for Professor Kamil Janacek, the chief economist of Komercni Banka in Prague, and an advocate of the "go-slow" approach.

"My stance as far as the adoption of the euro for the Czech Republic is concerned is: don't hurry. And I think that the costs in the near future of the early adoption of the euro surely would outweigh the benefits."

And the government seems to agree: the timetable for entry into the Eurozone is now 2010.

June was a big month for the Czech capital markets. The pharmaceutical company Zentiva issued the first Czech initial public offering, or IPO, seen on the sleepy Czech bourse in over a decade. The company also issued global depository receipts in London, which were five times oversubscribed.

The head of research at the Atlantik brokerage house, Jan Schiesser, explained why no companies had issued an IPO on the Czech bourse.

"The situation among the banks is actually not very favourable for an IPO because there is excess liquidity, interest rates are low. So, probably, for most companies it is better to get a loan rather than to go to the capital markets to raise capital — because that is relatively more expensive."

June also saw the country's first elections to the European Parliament. The Social Democrats suffered a major defeat, prompting party chairman Vladimir Spidla to step down. A new Cabinet was sworn in two month later, headed by the former Interior Minister, Stanislav Gross. Seen as a lame duck government, its struggles to push through a watered-down reform package.

2004 was a good year for tourism, however, with the floods of a couple years back largely forgotten. By the end of June a record number of foreigners — more than 3.5 million — had visited the Czech Republic this year. They spent more too, 12 percent more than in 2003.

July saw the release of a major report from CzechInvest, the state agency charged with attracting investment, noting a "radical shift" towards a knowledge-based economy, as the Czech labour force becomes better educated.

Former CzechInvest CEO Martin Jahn, who is now a government minister, told Radio Prague at the time that this country has been more successful in attracting FDI than its neighbours:

Martin JahnMartin Jahn "I think the main reason is, first of all, infrastructure. The Czech Republic has much better infrastructure allowing good access to all regions. And the second is the skill base, driven by the quality of technical education and industrial tradition."

Inflation hit a two-year high in August of 3.4 percent year-on-year, prompting the Czech National Bank to raise interest rates by 25 basis points to 2.5 percent. Analysts correctly predicted that inflationary pressures would continue to growing over the coming months. That month new reporting requirements for publicly listed companies were laid down. As of 2004, annual reports must list the salaries of company directors. The measure, based on U.S. law, was designed to prevent managers of firms on the verge of bankruptcy from paying themselves hefty remunerations.

Late in the summer, the International Monetary Fund's annual country report on the Czech Republic for predicted a favourable near-term outlook, with growth expected to firm, based on robust exports and export-related investment. However, the IMF said the new Czech government should take decisive action in key policy areas in order to enable the economy to "realize its full potential." The IMF said that growth in the Czech Republic remains sluggish compared with the other accession countries.

Speculation on the real estate market, meanwhile, reached a fever pitch, with prices for properties in Prague up as much as 20 percent over the pervious year and banks competing heavily for clients seeking mortgages. Development of new buildings and modernisation outstripped repairs and maintenance by a similar percentage.

The Anti-Monopoly Office,, imposed a fine of 500 million crowns - its highest ever — on six building societies for having allegedly agreed to fix fees.

100 days after EU expansion, data from U.K. and Irish authorities showed no flood of jobseekers from new member states like the Czech Republic. Along with Sweden, the U.K. and Ireland were the only old EU members fully open to jobseekers from the new member states.

Many Czechs, looking forward to equal status in the EU, felt betrayed by the restrictions.

"I was quite disappointed. I think it's not such a big problem; you have to obtain some permission to work in these countries, but... it was quite a disappointment for me."

In September, the OECD — the Organisation for Economic Co-operation and Development — said in a report what business people here already know: despite great advances, the Czech Republic remains among the most bureaucratic OECD member states in which to do business. Entrepreneurs here can expect to go spend 40 days and go through 10 administrative steps to launch a new business, for example, whereas in the OECD countries it takes on average 25 days. Closing a business here takes over 9 years as compared to just over 1.5 years on average in other OECD countries.

At the same time, the United Nations 'World Investment Report' predicts that the Czech Republic will continue to ride high on the global "near-shoring" and "off-shoring" trend with Prague as the destination of choice for European call centres and "back office" services.

Czech National Bank deputy governor Ludek Niedermayer said at the time that the Czech Republic will have to focus on attracting "value added" projects if it wants to fully capitalize on the anticipated growth.

"The Czech economy is no longer one providing investors with very cheap labour. There are more competitors with much lower costs of labour. So it's key for us to be able to compete in the area of services and investments with higher value added."

Meanwhile, the ratings agency Standard & Poor's downgraded the Czech Republic's sovereign rating a notch, due to political instability and the burgeoning budget deficit. Analyst Beatriz Merino explained:

"Basically, in the case of the Czech Republic, the downgrade by one notch means that the probability that the government is going to repay its debts is a little bit lower than it used to be. And that reflects the fact that the debt-to-GDP ratio has been increasing over the past few years, in the case of the Czech Republic. So basically, if you have more debt, they have to make more payments in terms of interest and servicing this debt."

October saw the government buying back its stake from the U.S. giant Boeing in the troubled jet aircraft maker Aero Vodochody for the symbolic price of 2 crowns. Boeing, which had failed to turn around the company, had initially demanded 1 billion crowns, or nearly $40 million, for its 35 percent stake in the company.

In November, the OECD had some more bad news for the Czech Republic: In a report on the state of the economy, the organisation warned that the objective of achieving a deficit equal to three percent of GDP by 2008, which is a condition for adopting the euro, looked out of reach, and the states pension and health care systems were in dire straights.

And finally, this month, the state budget for 2005 was signed into law. It envisages a hefty deficit of 84 billion Czech crowns, but opposition parties — and most economists — say the it will be much higher, over 100 billion crowns, once the state has covered the losses of the Czech bailout agency, which primarily ensures the privatisation of state-owned companies. Analysts say the increasingly unpopular Social Democrat-led government was unwilling to make much-needed spending cuts in sensitive areas, even though the Czech Republic looks unlikely to meet EU deficit-to-GDP ratio guidelines, the so-called Maastricht criteria.

On a positive note, one of the flagship Czech industries, if we can call it that, boasted record-high exports in 2004. Czech breweries expect to have export over 2.4 million hectolitres of beer this year, up by 12 per cent from the previous year.

Other major developments in the final weeks of the year 2004 included a move to fully liberalise the country's electricity and gas markets within three year, and, as of 2005, allow large companies the right to choose their natural gas supplier and the Cabinet's agreeing on a compromise approach for selling off the state's 51 percent stake in Cesky Telecom: The government will work on both a strategic sale and a stock-market floatation. If a suitable investor isn't found, the government will sell its stake on the capital markets.

But the most bizarre business event of the year came with the announcement that the broadcasting group CME, forced out of TV Nova five years ago, had bought back a controlling stake in the Czech commercial station, for some $642 million, well over the $354 the American group was awarded by in international arbitration for the "theft" of TV Nova.

30-12-2004