CZECH REPUBLIC
Region: Eastern Europe
Edition: July 2008
The 'DB' risk indicator provides a comparative, cross-border assessment of the risk of doing business in a country and encapsulates the risk that country-wide factors pose to the predictability of export payments and investment returns over a two year time horizon. The 'DB' risk indicator is a composite index of four over-arching country risk categories: Political risk - internal and external security situation, policy competency and consistency, and other such factors that determine whether a country fosters an enabling business environment; Commercial risk - the sanctity of contract, judicial competence, regulatory transparency, degree of systemic corruption, and other such factors that determine whether the business environment facilitates the conduct of commercial transactions; External risk - the current account balance, capital flows, FX reserves, size of external debt and all such factors that determine whether a country can generate enough FX to meet its trade and foreign investment liabilities; Macroeconomic risk - the inflation rate, government balance, money supply growth and all such macroeconomic factors that determine whether a country is able to deliver sustainable economic growth to provide further expansion in business opportunities. The DB risk indicator is divided into seven bands, ranging from DB1 through DB7. Each band is subdivided into quartiles (a-d), with an 'a' designation representing slightly less risk than a 'b' designation and so on. Only the DB7 indicator is not divided into quartiles.
Trade Terms
The minimum form of documentation or trading method that D&B advises its customers to consider when pursuing export trade with the stated country.
D&B's recommended means of payment. The use of recommended terms, which are generally more stringent than minimum terms, is appropriate when a customer's payment performance cannot be easily assessed or when an exporter may wish to limit the risk associated with a transaction made on minimum terms.
Normal period of credit associated with transactions with companies in the stated country. Transfer Situation
The time taken beyond agreed terms for a customer to deposit money in their local bank as payment for imports.
The average time between the placement of payment by the importer in the local banking system and the receipt of funds by the exporter. Such delays may be dependent on FX controls, FX availability and the efficiency of the local banking system. Trade & Commercial EnvironmentThe government is targeting a revised general budget deficit of 1.5% of GDP in 2008, compared with a previous projection of just under 3.0%. Although D&B agrees that the deficit is likely to be lower than the original estimate, spending pressures make it unlikely that it will be as low as the Ministry of Finance's revised projections suggest. In particular, pensions and teachers' pay are due to increase in August; while the Constitutional Court has abolished cuts in sickness benefits with effect from July (a law introduced in January withdrew state-funded compensation for the first three days of illness). These three items will cost the government about CZK10.0bn, in addition to CZK3.7bn paid to Japan's Nomura financial services group following an arbitration case.
Real GDP growth eased to 5.2% year on year (y/y) in Q1 2008 (its slowest pace in 3.5 years), from 6.6% in the previous quarter. Private consumption growth edged down to 2.7% y/y (the slowest since Q2 2005), while gross fixed capital formation expanded by just 2.0% y/y (down from 7.5% in Q4 2007). This reflected a lower level of investments in machinery and a large fall in investment in commercial property. However, aggregate economic growth was supported by robust net exports expansion (exports of goods and services were 12.5% higher than in Q1 2007, representing the 11th successive quarter of double-digit growth, although imports rose at a double-digit pace for the ninth quarter in succession, growing at 10.8% y/y). Increased inventories also played a significant role in boosting overall economic growth in Q1 as firms stockpiled unsold goods. The industrial sector continues to drive the economy, followed (some way behind) by services. Industrial production rose 12.2% y/y in April 2008 (adjusting for the effect of two extra business days, output still increased by 8.3%). The most dynamic sector continues to be automobiles, which, together with manufactures of electrical and optical equipment, accounts for two-thirds of the aggregate increase in industrial output. However, demand for Czech products is likely to moderate somewhat over the course of 2008, owing in part to the relative strength of the currency. The koruna has appreciated steadily since mid-May (it is up by more than 40.0% against the US dollar and around 20.0% against the euro, having broken through the psychologically important CZK24:EUR barrier in late June). This complicates the picture for the monetary authorities, who remain reluctant to increase interest rates from their 3.75% level (25 basis points below the ECB's benchmark rate of 4.00%), for fear of prompting a further rise in the value of the koruna. This is despite inflation averaging some 7.1% y/y in the first five months of 2008 (more than double the central bank's target). Although koruna appreciation has helped to ameliorate imported inflation, price growth has been high as a result of scheduled increases in indirect taxes, higher electricity and gas prices, and an increase in regulated prices; in particular, the process of gradually increasing regulated rents, which are to go up by about 19% per year on average in 2008-11, has already started. With international oil prices staying high and global food prices rising much more sharply than expected previously, we forecast an average inflation rate of 6.1% in 2008. Annual average inflation should then begin to trend downwards in 2009, as the indirect tax increases of 2008 drop out of the calculations, and as world food prices flatten out from late 2008 onwards.
DEFINITIONS Minimum Terms: The minimum form of documentation or trading method that D&B advises its customers to consider when pursuing export trade with the stated country. Recommended Terms: D&B's recommended means of payment. The use of recommended terms, which are generally more stringent than minimum terms, is appropriate when a customer's payment performance cannot be easily assessed or when an exporter may wish to limit the risk associated with a transaction made on minimum terms. Usual Terms: Normal period of credit associated with transactions with companies in the stated country. Local Delays: The time taken beyond agreed terms for a customer to deposit money in their local bank as payment for imports. F/X Bank Delays: The average time between the placement of payment by the importer in the local banking system and the receipt of funds by the exporter. Such delays may be dependent on FX controls, FX availability and the efficiency of the local banking system. C/A (current account) balance, % GDP: Part of the balance of payments that records a nation's exports and imports of goods and services, and income and transfer payments. DSR (debt service ratio), %: Annual interest and principal payments on a country's external debts as a percentage of exports of goods and services. Govt balance, % GDP: The balance of government expenditure and receipts. Real GDP growth, %: GDP adjusted for inflation. Inflation, %: The increase in prices over a given period.
GLOSSARY CiA Cash in Advance CLC Confirmed Letter of Credit CWP Claims Waiting Period FX Foreign Exchange LC Letter of Credit LT Long term MT Medium term OA Open Account SD Sight Draft ST Short term
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