Economic Analysis
Czechia (Czech Republic)

Czechia (Czech Republic)

Population 10.7 million
GDP per capita 22,943 US$
A4
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A2
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 3.0 -5.8 3.4 4.3
Inflation (yearly average, %) 2.6 3.3 3.7 3.8
Budget balance (% GDP) 0.3 -5.6 -7.0 -4.4
Current account balance (% GDP) -0.9 2.2 -1.5 -1.4
Public debt (% GDP) 30.0 37.7 42.5 44.5

(e): Estimate (f): Forecast

STRENGTHS

  • Central geographic location at the heart of industrial Europe
  • Tightly integrated in the international production chain, and more particularly the German one
  • Preferred destination for FDI in Central Europe
  • Significant industrial potential
  • Robust public accounts and banking system

WEAKNESSES

  • Small, open economy: exports account for 80% of GDP
  • Dependent on European demand: 64% of exports are to the Eurozone, one third to Germany
  • High foreign intermediate inputs in exports and low contribution of services to locally value-added in exports
  • Automotive sector occupies a large share of the economy
  • Lack of rapid transport links with the rest of Europe
  • Ageing population and shortage of skilled labour

RISK ASSESSMENT

Recovery shaken by supply chain disruptions

Although the Czech economy rebounded from the pandemic-induced doldrums amid eased restrictions and the economic recovery, the pace of growth was not sufficient to return fully to the pre-pandemic level in 2021. The latter should be reached in the middle of 2022. While strict restrictions that had been in force in late 2020 delayed the recovery, supply chain disruptions became a crucial drag on growth in 2021. This factor will be perceived also in the course of 2022, but diminish closer to year-end. The manufacturing sector is driven by the automotive industry and the activity in the German economy. Both factors remain crucial for Czechia. Exports to Germany reach nearly one-third of the total. The automotive sector generates over 9% of total gross value added, accounts for over 8% of total employment and above 26% of exports. The surge of demand for vehicles has been countered by a shortage of semiconductors, which forced the reduction in the automotive sector’s output. Gradually, exports should be improving, but foreign trade’s contribution to GDP growth will be impacted by robust imports. Indeed, household spending is expected to remain vivid thanks to increased disposable income, the fall in the savings rate and a favourable situation on the labour market. Despite the pandemic, the unemployment rate increased only marginally and remains the lowest in the European Union. However, labour shortages are again strong, and the shortage of materials has become an important obstacle for companies as well. Rising costs of inputs and higher consumer demand have driven inflationary pressures. Despite several interest rate hikes (by 350 basis points in total in the course of 2021), inflation is expected to remain high due to increased regulated energy prices from 2022 and companies transferring higher costs of production to final consumers.

 

Companies will be increasing fixed asset investments, while the EU will boost public investments in 2022, but also in the following years. Czechia's recovery and resilience plan enables the disbursement of EUR 7 billion (3.1% of GDP) in grants under the Recovery and Resilience Facility (RRF).

 

Fiscal consolidation

The budget balance will improve in 2022 thanks to the withdrawal of pandemic support measures. However, some of them, including the decrease in personal income tax, will still affect budget revenues. The recovery of private consumption and higher wages have already led to increases in indirect taxes and social security contributions. Expenditures will be driven by investments, especially those co-financed by ‘traditional’ EU funds, as well as from the Recovery and Resilience Facility (RRF). The public debt remains moderate, although it has increased during the pandemic due to higher financing needs. Indeed, since 2019, the general government debt is expected to rise by almost half until the end of 2022.

 

The current account balance will remain slightly negative, as supply chains disruptions will still affect Czech foreign trade, especially in the first half of 2022. Thereafter, it should start improving. However, increased imports thanks to solid demand, and higher income repatriated by foreign firms, will prevent the deficit from turning into a surplus. The Czech economy is highly open with various companies participating in global value chains. EU capital transfers and stable projected foreign direct investment inflows will comfortably support the current account balance.

 

New government

A five-party coalition won the latest parliamentary elections held in October 2021. The conservative Civic Democratic Party (ODS) leads the coalition with other parties in the Together alliance (the Christian and Democratic Union-Czechoslovak People's Party (KDU-CSL) and Top 09), as well as the progressive Pirate Party and the centrist Mayors. The coalition controls 108 of the 200 seats in the Chamber of Deputies (the lower house of parliament). The opposition consists of previously ruling Andrej Babis’ party ANO (72 seats) and the radical-right Freedom and Direct Democracy (SPD, 20 seats). Petr Fiala, the leader of ODS, was appointed as prime minister by the president of the Czech Republic, Milos Zeman at the end of November 2021. In December 2021, the new Czech government took office, however, its appointment was delayed by several weeks owing to President Zeman's ill health. The government has declared several general priorities. It plans to balance the budget by cutting government welfare expenditure rather than increasing taxes. It also aims to spend more on research and development, digitalisation and infrastructure projects (primarily highways and high-speed railways). The Czech security policy will be more pro-Western, with higher defence spending and a more hawkish stance towards Russia and China. The most urgent issues includes managing the pandemic and the fiscal budget. 

 

Last updated: February 2022

Payment

Czech law limits cash payments to a maximum of CZK 270,000 (approximately EUR 10,000). Purchasers who wish to make payments that exceed this limit must pay the entire sum via wire or bank transfer. Bank transfers are by far the most widely-used means of payment. The SWIFT system is fully operable in the Czechia, and provides an easier, quicker and cheaper method for handling international payments. The Czechia is part of the SEPA system, simplifying bank transfers inside the European region.

Cheques for domestic transactions are not widely used. Bills of exchange and promissory notes are commonly used as a security instrument, which present the purchaser with the option to access a fast-track procedure for ordering payment by court (under certain legal conditions). Electronic invoices are widely accepted. 

Debt Collection

To ensure the recovery of a debt in case of default, creditors should keep all documentation related to the transaction. This includes the original (written) contract, any documents related to the transaction (e.g. invoices and confirmed delivery notes), individual orders, and any other relevant documentation and/or correspondence. The main factors influencing effectiveness in debt collection are the age of the debt (the earlier the start of collection, the larger the chance for a successful recovery) and the reason for non-payment.

 

Amicable phase

Amicable debt collection is recommended, because it remains cheaper for creditor compared to legal proceedings. Amicable settlements are also enforceable in court.

 

Legal proceedings
Fast-track procedure / Order to pay

Platební rozkaz is a practical and rather short procedure, outlined in sections 172-175 of the Code of Civil Procedure (občanský soudní řád, CCP). The judge, convinced of the merits of the claim and without hearing the case, issues a payment order which is served to the defendant, who may either accept it or file a statement of opposition against it within fifteen days of its service. If the debtor opposes the debt, then the process continues as standard court proceedings.

If the legal action duly described and substantiated the creditor’s claim, the court can issue an order to pay, even if the creditor has not requested such an order. It takes on average three months for a decision to be made, ranging from a minimum of two months to a maximum of six months.

 

Ordinary procedure

Ordinary proceedings takes place after the defendant has disputed the claim during the platební rozkaz or by filing a dispute directly via the courts. Ordinary proceedings are partly in writing (parties filing submissions accompanied by all supporting case documents), and partly oral (both creditors and debtors present their cases during the main hearing). In practice, ordinary proceedings typically last from one to three years before the court renders a final and enforceable judgement.

On July 1, 2009 (Act No. 7/2009 Coll.), the CCP was amended to introduce more digital options in the justice process, so as to lessen the burden of judges and ensure the prevention of delays in proceedings. Since this amendment, all correspondence from Czech authorities to legal entities is delivered electronically via registered data boxes with special legal regulations (Act No. 300/2008 Coll., effective as of July 1, 2009).

Enforcement of a Legal Decision

Judicial enforcement is reserved only for matters specifically listed in the law. Monetary claims stemming from business relationships are enforced by a judicial executor (soudní executor) under Act No. 120/2001 Coll. (exekuční řád, the Execution Act). Enforcement by judicial executor is considered to be more effective, because the executor is a private-sector entity whose fees depend on a successful enforcement. A specific fees schedule applies based on the amount concerned by the execution.

As part of the EU, enforcement of foreign awards issued by an EU member state will benefit from advantageous enforcement conditions, such as the EU Payment Order or the European Small Claims procedure. Foreign awards rendered by non-EU countries can be recognized and enforced, provided that they have gone through the exequatur procedure under the Czech Private International Law and Procedure Act. 

Insolvency Proceedings

An insolvency petition can be lodged by either debtors themselves or their creditors, but a creditor must provide unambiguous evidence to support its claim, with one of the following:

  • an acknowledgement of debt (with the certified signature of the debtor or its representative);
  • an enforceable judgement;
  • an enforceable notary act;
  • an enforceable executor´s act;
  • confirmation of auditor or expert witness or tax advisor.

The creditor must in addition prove the existence of other creditors. Creditors are liable for damages caused by filing a bankruptcy petition where the conditions of insolvency were not met.

All insolvency petitions are recorded in an insolvency register (insolvenční rejstřík) kept by the Ministry of Justice, where all important information on insolvency proceedings is published. This also allows for insolvency proceedings to remain transparent.

The insolvency act introduces new methods and faster process, with single proceedings where the court decides on three particular solutions:

 

Reorganization

Reorganization is a method of resolving insolvency that aims to preserve the debtor’s business, while granting satisfaction to creditors. Insolvent debtors may initiate proceedings, but debt restructuration proposals must be approved by the court, with periodical inspection of its fulfilment by the creditors. The management retains the right to manage the business.

 

Bankruptcy

Bankruptcy is a court-ordered method of resolving insolvency, whose aim is to monetize all assets of debtor and thus obtained yield to distribute between creditors who have lodged their claims into the proceedings. The authorization to dispose of debtor´s assets and to sell those assets is granted to a bankruptcy trustee who is appointed by court. At this point; the business declared bankrupt is no longer allowed to conduct business operations independently.

 

Debt clearance

Used mainly by individuals (non-entrepreneurs), this is a method of resolving insolvency which presents an alternative to declaring bankruptcy. The Insolvent debtor clears the debt, but under Court control he is obliged to pay only a reduced percentage of total debts.

 

Liquidation

The liquidation procedure begins once it is decided that a company is to be wound up. Either the management or the court appoints a liquidator in charge of liquidating the company’s assets and collecting receivables. Creditors must register their claims within 90 days following publication of the court’s decision, in order to get satisfaction during the liquidation proceedings. All claims of creditors must be fully satisfied in liquidation proceedings. It is important to note that liquidation proceedings are not considered as a method of insolvency in Czech law: in the event that the liquidator finds there are not enough assets to satisfy all claims during liquidation, he is obliged to file a petition for insolvency. At this point, the liquidation turns into insolvency; a separate proceeding.

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