Business News

State budget balance 1993-2003 (draft), graph: CTK

The stock markets in the Czech Republic have been facing difficulties due to low demand for trading and initially also an insufficient legislative framework. In this weeks edition of Economics Report, we talk to a capital market expert about the system of stock markets in the Czech Republic, their development over the past decade and some of the main problems. Of course, we also have the latest business news of the past seven days.

Negotiations within the governing coalition continue regarding next year's budget

State budget balance 1993-2003 (draft), graph: CTK
Intense negotiations between the governing Social Democrat party and its coalition partners are taking place regarding next years budget. Both junior partners in the coalition, the Freedom Union and the Christian Democrats, are negotiating to limit the budget deficit from the current 157 billion crowns or 5 billion US dollars to about 100 billion crowns. The coalition partners are also seeking the introduction of more stringent social welfare laws including pension reform in exchange for their support of the draft budget proposal in Parliament. Further negotiations are to resume next week.

Sale of state controlled chemical giant Unipetrol to Agrofert cancelled

The sale of the government's majority share in the chemical giant Unipetrol has been cancelled. Unipetrol, which was to be privatised by the end of this year, was awarded to the Czech chemical group Agrofert. Last week we reported that Agrofert failed to pay for the Czech governments majority stake in Unipetrol. The finance ministry should devise a strategy for the future of Unipetrol by mid November.

Cabinet delays the sale of the states share in Czech Telecom

The cabinet has decided to change the Telecommunications Act in order to create better conditions for competition with the dominant operator, Czech Telecom. The cabinet approved a draft proposal for an amendment to the Telecommunications Act which would allow alternative telecom operators to lease Czech Telecoms local networks. The draft bill should be finalised by the end of November. In a related development, Finance Minister Bohuslav Sobotka is to delay the submission of a draft contract for the sale of Czech Telecom till the end of October. The buyer of Czech Telecoms majority stake, a consortium headed by Deutsche Bank, has asked for signing of the contract to be postponed.

More bad news for Czech stock markets

The RM-System, which is the second largest stock market in the Czech Republic, recently closed down almost one third of its outlets because of low demand for trading. Stock markets in the Czech Republic have not had an easy time developing and adjusting to the Czech economic environment since their inception in the early 1990s. Martin Hrobsky talked to Andrea Ferancova who is the director for trading at the Czech brokerage house Wood and Company about the system of stock markets in the Czech Republic, their development over the past decade and why they are continually facing difficulties.

"Generally we can say that the Czech stock market went through a very nice and of course not so nice times. At the beginning we could see a lot of excitement, especially for the emerging markets. We could see a lot of international investors or a lot of international money flowing into the Czech Republic. But we could also see some disappointment, especially with cases such as the Czech investment fund which created a little bit of negative influence in the opinion of international investors. I would say lately the situation is stable, the Czech market is again, especially this year, interesting for international as well domestic investors. This is very much connected with the economic cycle, I dont mean strength regarding only GDP growth but strength regarding stability. The economy is very stable, especially on the market level, and this year the Czech Republic is one of the best performing markets in the world."

So what do you think are some of the problems with the Czech stock markets?

"The problem with the Czech stock market is liquidity, the market is quite small and of course the biggest problem is that there is not enough issues on the market, we would need some more IPOs. We dont really expect any in the near future so I would say this is one of the biggest problems. As we could see from the 1990s a lot of stocks were on the market including the Prague stock exchange as well as on the RM-system, which actually came from the voucher privatization. At the moment the real volume is in eight or maybe nine stocks. Of course the biggest problem is that the number of companies traded on the market is not large enough and there are no new companies looking for financial resources on the markets."

Why do you think companies are not using the stock market as a means of raising capital?

"Again I think it is connected with the past, a lot of companies that were on the market from the voucher privatization didnt really use it as a financial source, they were just listed but they didnt actually get any money from the stock market. I think generally the view of the people is that the stock or capital market doesnt work or the stock market does not work as it should and they are partially not aware of the possibility. The privatization of Czech companies is another issue. Because at least some companies could be privatized partially through the stock exchange. The government didnt in the past put any state-owned companies on the stock exchange, they always try to sell it directly to a strategic investor which is again another reason why there are no IPOs on the market."

How do you think the Prague stock exchange could survive in the future?

"Of course this is quite a simple answer, it needs new issues. Of course this depends on how the government will privatize other companies which are actually still going into privatization. We hope that some private companies will be looking in the future for financing on the Prague stock exchange, and this would definitely help. Otherwise, in case there are not any new issues we can expect that the volume of the stock exchange will be lower and lower and we will see a contraction on the Prague stock exchange."

In a related story, the Prague Stock exchange is to hold talks with its German counterpart, Deutsche Borse, on a possible cooperation plan. Talks will begin next month and will largely take the form of possible technical cooperation and an IT platforms. However, the Prague Stock exchange recently invested a great deal of money into its own share trading system, so it is unclear what form of cooperation will take place between the two exchanges. Currently no exchange agreement exists between the Prague stock exchange and those in Central Europe. Talks of regional cooperation between the stock exchanges of Central Europe are nothing new nor have they been successful. In 2000 the Vienna stock exchange tried to lure Central European blue chips to trade on newly launched Newex market but to no avail. Stock exchanges in Central Europe face mounting pressure to cooperate because accession to the European Union will mean more competitive pressure from the larger and well established stock exchanges of Western Europe. However, Andrea Ferancova of Wood and Company says it is difficult to predict the outcome of negotiations between the individual national stock exchanges.

Of course there is a lot of these negotiations regarding the stock exchanges, the question is what king of cooperation. I think if there is any kind cooperation it could be actually positive for both markets. However, it is very difficult to say at the moment what they are going to create together.