Czechia (Czech Republic)

major macro economic indicators

(e): Estimate. (f): Forecast.

RISK ASSESSMENT

Dynamic economic activity

The Czech economy is expected to keep a fair rate of growth in 2019. As in previous years, the economic activity is strongly supported by growing household consumption, which benefits from increased consumer confidence thanks to growing wages and decreasing unemployment. The jobless rate remains at the lowest level in the EU, reaching 2.3% in September 2018. Whereas the situation on the labour market is positive for households, companies are concerned: the talent pool is limited and the number of job vacancies has soared to the highest level in the EU. Facing labour cost increases, further strong wage pressures, and higher input prices, companies’ profitability has barely increased. The Czech labour market will still be challenging for businesses in the coming years, especially as the supply of labour will suffer from aging population. Private investment continues its recovery and remains the second-most important contributor to growth because of the high capacity utilisation ratio and the surge of public investments supported by EU funds. Despite this, investments are likely to be less robust in 2019 than in 2018, mostly due to moderating public investment.

Since August 2017, the Czech central bank has been gradually raising its interest rates, further worsening the tensions on the koruna that have been in force since the bank decided to abandon the cap on koruna/euro exchange rate in April 2017. This had led to the domestic currency’s appreciation, although this was not amplified by recent interest rate hikes. Nevertheless, higher rates temper inflationary pressures. Inflation in 2019 is likely to exceed the Czech National Bank’s target of 2%, but drop below it the following year.

As a small open economy, Czechia is highly dependent on the external sector. The automotive sector – which accounts for 28% of industrial production, 20% of exports of goods and 10% of GDP – is expected to grow fairly. Western European demand is crucial in this regard, but the inclusion of Czech companies in global production chains (not only in the automotive sector) makes them vulnerable to weaker global trade dynamics.

Solid fiscal position and trade balance surplus

Despite some easing, the government's fiscal policy remains cautious, helping keep the public accounts to similar levels as last year and still generating a budget surplus. The increase of public wages and higher indexation of pensions are expected to be compensated by rising revenues, thanks in part to the improved tax collectability. Public debt will remain on its alleviating path.

The trade balance shows a structural surplus (5.0% of GDP in 2017) thanks to close integration in the European – especially German and automotive – production chain. However, the previous appreciation of the koruna, as well as robust domestic demand, limits the trade surplus. Moreover, weaker external demand will contribute to slowing the growth of exports. At the same time, imports are likely to record lower dynamics in line with moderating investments, which have relatively high import content.

Formation of a minority government, weakened by allegations concerning the new Prime Minister

The ANO 2011 (centre-right) movement led by Andrej Babis won the October 2017 elections by a large margin, obtaining 30% of the votes cast and 78 out 200 seats in Parliament. Nevertheless, the traditional parties refused to enter into a coalition with this party, whose leader has been charged with the fraudulent use of European funds. The traditional parties received a historically low share of the votes, with the Social Democratic Party (CSSD), to which the outgoing Prime Minister belongs, relegated to sixth place (only 7% of the votes). Conversely, the rival parties have made significant progress with the Czech Pirate Party (10.8%) and the extreme-right Freedom and Direct Democracy Party (10.6%), who were able to profit from distrust of migrants and Euroscepticism. With nine parties represented, the fragmented Parliament made it impossible to form a majority government. The government won confidence votes in July 2018 and again in November 2018. The Communist party supported the minority coalition between Ano and the CSSD. Although the Communists remain outside the government, their deal with Mr Babis brought them the closest they have been to power since 1989.

Last update : February 2019

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.

Insolvency

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.