EET that 2016: a review of economic and business highlights

Photo: freeimages

If you’re casting around for key words in the Czech economy for 2016 then some of the following might be among the top 10: OKD, EET, Škoda Auto, low crown, Jiři Rusnok, jobs, wages, China, TTIP, and beer.

Photo: freeimages
At the macro-economic level, it looks as if everything has more or less gone to plan. At the end of 2015 the Czech National Bank was predicting a sharp slowdown in growth for the following year to just under 3 percent. And with its latest forecast for 2016 GDP at 2.8 percent, that looks on target.

The deceleration factors were focused on a slowdown in EU funds and curbed central government spending. But the domestic economy was expected to give a greater boost with unemployment shrinking and more money flowing into the pockets for wage earning Czechs. And the economy has largely kept to script on those predictions as well. Unemployment in November dropped to 4.9 percent with the country boasting one of the lowest jobless rates in the European Union.

“We will not allow a dramatic development in the rate of the crown which did not respond to the state of the Czech economy.”

But while employers – especially in manufacturing industry – complained of the difficulty of hiring skilled workers, unions pointed out that in many cases the wages on offer for many of those jobs were still ludicrously low compared with what is on offer in developed West European countries. The government has tried to do its bit by pushing up the minimum wage and increasing public sector wages, especially in areas which have lagged badly in the past such as for teachers and health workers. And a report by the government itself argues that there’s room for Czech wages to climb on average by a quarter or a third.

But in spite of rising wages feeding to some extent into higher prices, the central bank has proved wide of the mark on its original inflation prediction and therefore on its fundamental monetary policy expectations of when an end would be called to the low crown policy. Around 12 months ago the bank expected to see annual inflation running at around 1.4 percent by the end of this year and be up to 2.2 percent by the end of 2017, above its key target figure of 2.0 percent.

True, the inflation rate this November surged to 1.5 percent, but this appears a blip compared with previous months with the average rate over the previous 12 months coming in at 0.5 percent. And the central bank now expects its 2.0 percent target rate of inflation to be reached in the second half of 2017. And that, could trigger the much delayed move to ease out of the low crown regime by the second half of 2017 at the earliest.

Jiří Rusnok,  photo: Filip Jandourek
That will unquestionably be a major test for bank governor Jiří Rusnok, who replaced the former bank governor Miroslav Singer at the start of July 2016. He has pledged a non-disruptive move from the low crown policy, that has seen the crown pegged at or lower than 27 crowns to the euro since November 2013, with measures taken to make sure the crown does not strengthen too fast. This is what the governor had to say in September:

“The debate about how the low crown will end has not taken place, not even in the bank board. And in my opinion it is a bit redundant. We have said that whatever will be the manner of leaving the so-called currency commitment, we will not allow a dramatic development in the rate of the crown which did not respond to the state of the Czech economy.”

The low crown has fuelled Czech exports, and the trade balance till the end of October this year was at 178 billion crowns already higher than the total for the whole of 2015. 2015 was a record year for Czech trade with the end of year trade surplus coming in at just under 150 billion crowns.

The exporter of the year has, unsurprisingly been, Škoda Auto. And the biggest car maker is set to break production records in 2016 as it struggles to meet demand from both buoyant foreign and domestic markets. Škoda already delivered a million cars to customers in mid-November, a month earlier than it reached the same milestone in 2015. Overall sales in the first 11 months of this year were just short of 7 percent higher than in 2015.

“We now have around 10,000 [in hard coal] and in the uranium industry around 800.”

At the other end of the business success scale, the saga of the Czech Republic’s last remaining hard coal mining company, OKD, has stretched throughout the year. OKD is now in insolvency management with bosses still working on a rescue plan that could ensure seven or more years of operation for the most viable mines and a smooth withdrawal from the coal industry for the Moravia-Silesia region. Mid-year, Minister of Industry and Trade Jan Mládek put a longer term perspective on the problem:

“When the Velvet Revolution occurred around 26 years ago, we had around 100,000 hard coal miners and around 30,000 in the uranium mining and processing industry. We now have around 10,000 [in hard coal] and in the uranium industry around 800. So we have been able to deal with this.”

At one stage over the year, there was speculation that a Chinese bid might be made for OKD. That appears to have been wide of the mark. But there certainly was a Chinese spending spree in the Czech Republic in 2016 on the coattails of the state visit by Chinese president Xi Jinping at the end of March. Czech president Miloš Zeman said at the time that he expected Chinese investments this year to total around 95 billion crowns (around 3.2 billion euros).

Andrej Babiš,  photo: Filip Jandourek
Several months later, some Czechs were still wondering, in spite of a spending spree by the company CEFC, if this was a realistic estimate and whether China really was a strategic business partner. The question was later put to finance minister and ANO leader Andrej Babiš:

“It’s a good question. We in the government – as I have looked back on now – did not discuss this strategic partnership. It was treated in the government as an item for information. There were a series of agreements signed and I am still waiting expectantly for what results specifically for the Czech economy. The investments so far, by investment groups such as CEFC, have been purchases of property or in the portfolio of private owners or shareholders. I don’t yet see any direct Chinese investment that would have a direct beneficial effect on the Czech budget. I spoke about this with the Czech president, certainly, we would like to see them construct some factory and employ our people.”

Andrej Babiš was at the heart of another business innovation this year with the roll out of his electronic cash registers to fight tax fraud. The measure – largely copied from a series of Balkans countries – forces businesses to install cash registers which send electronic notification of all transactions to the tax office and in effect squeeze out the grey or undeclared economy.

“I don’t yet see any direct Chinese investment that would have a direct beneficial effect on the Czech budget.“

Restaurants, pensions and hotels were the first to fall in line with the new rules on the so-called EET. And in spite of warnings that the whole system might collapse or face boycotts, the first and following days proved remarkably incident free. Babiš estimates that electronic cash registers when fully in operation will clampdown on around 170 billion crowns of tax fraud a year. The opposition has pledged to challenge EET in the Constitutional Court.

On the trade front, the Czech Republic, with its open and export oriented economy, was always a big cheerleader for the Trans-Atlantic Trade and Investment Partnership (TTIP). It was supposed to revolutionise two-way trade between the EU and United States by pulling down most of the non-tariff barriers – such as trade and licensing standards – that hamper the flow of goods. US president elect Donald Trump looks like he has put paid to that ambitious agreement with his open hostility to multinational trade pacts.

Photo: Czech Television
And finally, one of the ikons of the Czech beer sector is set to change hands again. Pleňský Prazdroj looks like it will be back in Japanese ownership, specifically that of the Asahi Group Holding, after a sale by SABMiller. Most of the big breweries, with the sole exception of state –owned Budějovický Budvar are foreign owned. But for Budvar as well, 2016 has been a landmark year as well with long time manager Jiří Boček stepping down after 25 years at the top.