HISTORY CURRENT SIGNS DEVELOPMENT OF THE MAIN ECONOMIC INDICATORS

BANKING SYSTEM OF THE CZECH REPUBLIC CAPITAL MARKET

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HISTORY
At the beginning of this century the territory of the Czech Republic was one of the most economically developed parts of Europe and was the most industrialized part of the former Austro-Hungarian Empire. Between the two world wars, the Czech lands were listed among the ten most developed states of the world.

After the Second World War, however, the Czech state came under the Soviet sphere of influence and for forty years was the victim of communist experimentation. Market relations were deeply repressed, market institutions were liquidated and industry, land, and trade were completely nationalized and submitted to central control. The whole country went through a long and destructive economic period of stagnation and actual decline in some areas. The mass production put more stress on quantity rather than quality. The central plan answered the questions How much ? and What to produce ? and the natural function of market (determination of price, quality and quantity) was bypassed. The system was very ineffective and the products were not competitive. Therefore the majority of foreign trade could have been done only with other communistic countries.

Despite this stagnation, even under the communists many companies maintained or built-up relatively respectable reputations:

The fall of communism in l989 opened the road to economic reversal and the reintroduction of a market economy through economic transformation, which drew upon five basic measures:
- liberalization of prices and foreign trade
- internal convertibility of the currency
- privatization programs
- restrictive monetary and financial policy of the state
- tax reform

CURRENT SIGNS

Today the transformation of the economy is nearing completion and there are many encouraging signs of economic recovery:

• The private sector has begun to prevail in the economy and its influence on general economic development is steadily increasing. Millions of Czechs participated in the unique coupon privatization scheme. The process enabled citizens to purchase inexpensive coupon booklets of privatization points which they could exchange for shares in companies. Today the state owns only the strategic and huge companies which are slowly being privatized.
• The goods and labour market is quickly developing and capital market has been established.
• The foreign currency exchange rate has been stabilized (for the past 8 years it has been maintained at approximately CZK 30-40 to USD 1, (CZK 18 to DEM l.) In 1994 the exchange rate was 1 USD to CZK 28.78 while in 1995 it decreased to CZK 26.14. After a long period of stabilization, it increased from May to December 1997 from roughly CZK 29 to 32 to USD 1and from CZK 18.5 to CZK 19.5 to DEM 1 (e.g. on May, 2000 it was 40.5 Kč to 1 USD and CZK 19.05 to 1 DEM).
• The balance of payments is in surplus and foreign currency reserves reached 12.6 billion USD on (April 2000).
• Inflation is under control and the rate is expected to stay at or below 7 percent in the near future, according to government and OECD estimates.
• The state domestic and foreign debt reached 5,576 million USD (approx. 12% of gross domestic product) in the middle of 1997 (i.e. 541 USD per capita.) Foreign debt was 21,174 million USD (2,055 per capita.) The Czech government repaid all its loans to the International Monetary Fund in the summer of 1994 - two years ahead of time.
• The unemployment rate remains relatively low compared to the EU countries and is expected to keep the low values also in a long term period.
  4.13% in 1991, 2.96% in 1995, 5.0% in 1997 and 9.6 % in February 2000.
• The export market is rapidly and successfully shifting to the markets of OECD countries, and exports themselves are rapidly increasing. In 1999 the dominant position of developed market economies in Czech exports and imports has been strengthened. In both exports and imports Czech foreign trade has been concentrating on products with a higher degree of processing.

DEVELOPMENT OF THE MAIN ECONOMIC INDICATORS

Gross Domestic Product
The noticeable decline in real gross domestic product (GDP) during l991 slowed down and in 1993 the situation further stabilized. GDP increased in the following years and, according to government estimates, it is expected to rise further. From 1993 to 1996, GDP increased very quickly. In comparison with 1990, it has already reached 95%. In 1997, in the estimation from December, dynamic growth decreased to 1.5%. Currently after the governmental packages in 1997 and strict monetary policy of the CNB, the economy growth slowed down. For the first time the real wages decreased, the growth of GDP January- April 1998 was -0.9%. The causes are mainly in the decrease of domestic consumption, which was caused by the decreasing value of real wages. The prime goal of the new government (formed after elections in June 1998) is to start up sustainable and long-term economic growth.

Industrial Production
The long-term decline of industrial production is a natural process involving a decrease in the production of unnecessary products and a reduction of the disproportionate amount of heavy and light industry in gross domestic product. The loss of markets in Slovakia after the split, and economic stagnation in Western Europe are also playing a role. Of those large and medium-size industrial enterprises already privatized by coupon privatization, some have been harmed because new owners were slow to take control of management. From the beginning of 1995, industrial production began to increase and in 1997 reached 83% of the level of 1990. The newest number of industrial production looks very positively, from January to May 1998 the Industrial production grew by 7.1%.

Consumer Prices
The complete liberalization of prices which began on January 1, 1991 led to an extreme but isolated rise in prices. The introduction of value added tax (VAT) on 1.1.1993 brought another price shock. Consumers prices (inflation) are relatively stabile. After having fallen below 10% of yearly inflation in 1995 until 1997, in 1998 inflation will reach more than 10% after the currency devaluation and because of rent and energy prices liberalization. Recently the Central bank (CNB) has announced an inflation target which the institution wants to reach (net inflation 5.5% - 6.5% in 1998). Therefore the bank introduced a strict monetary policy for which it is criticized from many sides. The last indicators of net inflation (6.5% June 1998) show that the CNB reaches its goal quite successfully, therefore a slow decrease in interest rates might come.

Foreign trade
The Czech Republic imported more than it exported, it is presumably an essential and inevitable part of the transition period. The market was completely unsaturated with foreign goods, esp. goods from developed countries and the gap needed to be filled. Another fact supporting this idea is the low level of competitiveness of "communistic goods" and therefore low demand from abroad.
The trade balance deficit in the Czech Republic peaked in 1996 (5.8 billion USD) and from than on it gradually decreases, prediction for the year 1998 is 2.6 billion USD. The territorial structure of the Czech Republic's foreign trade turnover has changed considerably since 1990. Trade with all post-Communist states has decreased substantially while trade with the European Union and European Free Trade Association countries has increased significantly. Foreign trade capacity has been increasing permanently, whereby since 1994 increases in imports gradually exceeded increases in exports. Foreign trade turnover of industrial countries with a developed market economy is approx. 70%. Foreign trade turnover of European countries with a transitive economy including Commonwealth of Independent States (Russia) represents a quarter only, whereby developing countries are represented by 5% only.

State Budget
The state budget for l993 registered a slight surplus. Revenues totaled CZK 358 billion and expenditure CZK 356.9 billion. The government proposed a balanced state budget for 1994, which was approved by Parliament. At the end of the first half of 1994, the state budget registered a surplus of CZK 9.7 billion. The state budget for 1996 had revenues of CZK 482.2 billion and expenditure of CZK 484.3 billion (deficit CZK 2.1billion). In 1997, the budget finished again in slight deficit of CZK 15.7 billion. For 1998, a well balanced budget with revenues and expenses of CZK 536.6 billion was accepted. In June 1998 the Social Democratic Party formed the government and from their proclamations the Czech Republic might experience slightly deficit budget for the fiscal year 1999.

Exchange Rate
In 1990 the Czechoslovak currency was depreciated three times thus deflating the artificially high exchange rate of the crown. Since May 1993 the Czech crown has been pegged to the two most important world currencies - USD and DEM - fluctuating only to the extent that the exchange rate between these two currencies fluctuates. The rate of exchange was firming up from CZK 29 for USD 1 in 1990 up to CZK 26 and 27 in 1995 and 1996 and the Czech crown ranked among freely convertible currencies. In June 1997, the State Bank declared a "free floating rate". The rate of the Czech crown sank and in 1997, it has been fluctuating between CZK 32 and 35 to 1 USD and between CZK 18.5 and 19.5 to 1 DEM. In spring 1998 the currency appreciated dramatically and reached values of CZK 17.5 for DEM 1 and CZK 30.0 for USD 1. This situation is mainly caused by the interest rate differential between local and world interest rates. The differential attracts short term capital and assures relatively risk free profits. The Central bank keeps the interest rates high because of its inflationary goals. (official ex-rates by CNB).

Foreign Investments
The Czech government announced a 7-point package of incentives in April 1998 which is designed to make the natural advantages of the country’s location even more attractive to new investors and to bring the Czech Republic into line with its competitors for mobile inward investment, namely Poland, Hungary and leading western European countries. The Czech Republic offers to investors stable political and economic environment and low level of wages compared to standards in western countries. Moreover the labour force is highly skilled and easy to adopt new methods of working.

Foreign Direct Investments (FDI) in million USD:

Territorial structure of FDI`s in million USD:

In the field structure, investment into communications remains in the first place. Next comes investment into consumer industry and tobacco and car production. From the territorial point of view, the greatest flood is noticed from Germany, Netherlands, USA and Switzerland.

BANKING SYSTEM OF THE CZECH REPUBLIC

The banking system can be divided into three groups.

	Large banks, which emerged before l990 and which offer a complete assortment of banking services and command a wide network of branches. These include Česká spořitelna (Czech Savings Bank), Investiční a poštovní banka (Investment and Postal Bank), Komerční banka (Commercial Bank), the Československá obchodní banka (Czechoslovak Commercial Bank) and Živnostenská Bank.
	The second group is composed of smaller Czech banks with a relatively minor share of foreign capital. They offer certain specialized services, the majority of which are oriented toward the private sector.
	The third group is comprised of foreign banks which help complement the necessary competitive environment in the banking sector.

A new amendment to the banking law provides for state insurance of deposits in the country, which brings the Czech Republic's laws in this area closer into line with European norms.


Structure of Banking system in the Czech Republic

Central Bank (Česká Národní Banka ČNB)

Banks with mostly (more than 50 %) Czech financial participation

Banks with mostly (more than 50 %) foreign financial participation

Branches of foreign banks

CAPITAL MARKET

The capital market emerged in 1993. Crucial practical steps were taken for the development of stocks and shares in the Czech Republic during 1994. These processes led to the creation of the Stock Exchange of Securities Praha, and the stock trading agency known as RM-System. Stock and shares are traded on the Stock Exchange. Currently the Prague Stock Exchange has 83 (April 1998) members who are entitled to trade with 412 issues (1997 number). Other interested parties have access to the market only through the mediation of these members. New institutions such as Stock exchange commission are observing the correctness of trading on the market.
After the privatization the stock market had 1750 issues, this amount was too large and there were many titles with low liquidity, the market was very diluted and unorganized. In recent years the shares undergo a selection and only the companies which fulfill criteria set by the Prague Stock Exchange can stay on the main market. In the framework of the automatic electronic securities market, the RM-System is used mainly by minor investors who acquired their shares through coupon privatization and who have difficulty gaining access to the Stock Exchange. On the whole, trading is done within the framework of the RM-S with approximately l,l00 securities.