Economic analysis
Czechia (Czech Republic)

Czechia (Czech Republic)

Population 10.5 million
GDP per capita 26,849 US$
A4
Country risk assessment
A2
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Synthesis

major macro economic indicators

  2020 2021 2022 (e) 2023 (f)
GDP growth (%) -5.5 3.5 2.4 0.1
Inflation (yearly average, %) 3.3 3.3 14.8 9.8
Budget balance (% GDP) -5.8 -5.1 -4.4 -4.0
Current account balance (% GDP) 0.7 -2.6 -4.1 -4.4
Public debt (% GDP) 37.7 42.0 43.1 43.9

(e): Estimate (f): Forecast

STRENGTHS

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

WEAKNESSES

  • Small, open economy: exports account for 73% of GDP
  • Dependent on European demand, particularly from Germany
  • High foreign intermediate inputs in exports and low contribution of services to local 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

Economic activity severely affected by the consequences of the Russia-Ukraine war

Despite solid growth in the first half of 2022 driven by the post-Covid recovery, Czech economic activity has since borne the brunt of the Russian invasion of Ukraine, the impact of which will continue to affect the Czech Republic's economy in 2023 as the country slips into stagnation mode. While industrial production (38% of GDP) remained relatively strong in 2022 due to a large backlog of orders following supply chain disruptions in 2021, industrial production is expected to falter in 2023. Driven by the automotive industry (10% of GDP, 25% of exports) and external demand, the country's industrial base will be weakened by the shortage of semi-conductors, high energy prices and the deteriorating economic outlook of the Czech Republic's main trading partners, especially Germany, which accounts for a third of the country's exports. Thus, despite the decrease in imports, the contribution of foreign trade to GDP growth will be negative. While the uncertain economic environment will also have a negative impact on private investment growth, public investment’s impact will be just the opposite, stimulated by support from European funds in the shape of EUR 7 billion (3.1% of GDP) in grants from now until 2026 under the European Union's Recovery and Resilience Facility (RRF). Last, despite the robustness of the labour market (unemployment rate at 2.4% in early 2023) and government anti-inflationary measures to support households, private consumption will contribute negatively to the economic expansion, which has been weakened by high food and energy prices and negative real wage growth. After peaking at 18% in September 2022, inflation reached its highest level since the 1990s, forcing the Czech National Bank (CNB) to raise its policy rate by a cumulative 675 basis points to 7% between June 2021 and June 2022. While annual inflation will remain above the CNB's target of 2%, it could fall, spurred by the duo of falling domestic demand and easing energy markets.

 

Persistent twin deficits

The withdrawal of pandemic-related support measures was not enough to improve the Czech Republic's budget balance in 2022 as at the same time government spending remained high to support economic activity against the backdrop of the war in Ukraine. Despite the government's commitment to a fiscal consolidation programme aimed at reducing public spending by 0.9% of GDP by 2024 and reforming the pension system, the government deficit is expected to remain in 2023. Revenue increases that were made possible by the introduction of one-off taxes such as the windfall income tax from energy companies (1.1% of GDP) and banks (1.5% of GDP) will only partly offset the increase in expenditure. The latter will be largely related to household and business support measures to help them cope with rising commodity prices, with the government allocating CZK 72 billion (1% of GDP) to cap electricity and gas prices. Despite rising borrowing costs, the government will easily finance its deficit by tapping sovereign debt markets and securing European funding under the RRF. However, while the Czech Republic's public debt-to-GDP ratio remains low relative to its peers, it will continue to rise slowly as successive budget deficits accumulate and interest rates rise. At the same time, the foreign currency share of public debt is increasing at a rapid pace given the higher bond yields on koruna-denominated debt (7.5% at the end of 2021 compared with over 20% in 2023).

 

The current account balance deteriorated in 2022, as the trade deficit widened due to rapidly rising energy import prices. Despite a smaller trade deficit, made possible by the drastic reduction in domestic demand and the fall in energy prices, the current account deficit is not expected to narrow in 2023. While the services surplus (1.5% of GDP) will remain unchanged, the primary income deficit (-2.9% of GDP) is expected to widen as dividend payments in the banking sector resume. While the Czech Republic has long been a favoured destination for foreign direct investment flows in the region, they have remained modest since the economic crisis stemming from the Covid-19 pandemic and will cover only a small share of the current account deficit in 2023. The considerable foreign exchange reserves will allow the Czech Republic to easily finance its current account deficit, after they comfortably covered 7.5 months of imports at the end of 2022 following CNB actions in the foreign exchange market to support the Czech koruna.

 

Strengthening the governing coalition in the face of war in Ukraine

Following his victory in the January 2023 presidential election, Petr Pavel, an independent candidate supported by the ruling centre-right coalition, was sworn in on 9 March 2023. His election paves the way for a closer union between the ministerial cabinet and the presidency. Since the October 2021 parliamentary elections, a five-party coalition has governed the country, led by Prime Minister and leader of the conservative Civic Democratic Party (ODS), Petr Fiala. The ODS, an ally of the Christian Democratic Union-Czechoslovak People's Party (KDU-CSL) and Top 09 in the Spolu coalition, formed an alliance with the progressive Pirate Party and the centrist Mayors Party. Together they control 108 of the 200 seats in the Chamber of Deputies. The opposition consists of former Prime Minister Andrej Babis' ANO party (72 seats) and the radical right-wing Freedom and Direct Democracy party (SPD, 20 seats). Russia's invasion of Ukraine has eased inter-party conflicts within the coalition and shifted the immediate political focus of the government to conflictual budgetary decisions. The political environment is thus expected to remain stable until the next parliamentary elections in 2025.

 

Czech-Russian relations were already strained before the war in Ukraine, and consequently the Russian invasion has deeply affected the Czech Republic's foreign policy. Petr Pavel has increased defence spending to the NATO target of 2% of GDP, up from 1.4% in early 2022. In addition, the Czech Republic has been heavily involved in supporting Ukraine, taking in refugees on a massive scale and providing significant humanitarian and military support.

 

Last updated: June 2023

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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