Czechia (Czech Republic)

major macro economic indicators

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

RISK ASSESSMENT

Growth gradually losing momentum

The Czech economy is strongly linked to external demand with exports at almost 80% of GDP. Unsurprisingly, its GDP growth follows the global trend and country’s crucial export market, i.e. Germany. Therefore, growth has been decelerating since 2017. Czechia has been one of the CEE countries that first started to experience the Eurozone slowdown. In 2020, GDP growth will weaken only slightly but will remain at a level below regional peers. The economic activity continues to be driven by household consumption, which benefits from a favorable labor market, further wage growth and robust consumer confidence. The unemployment rate remains at the lowest level in the EU, reaching 2.1% in September 2019. While the situation on the labor 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.

Fixed asset investments, especially those in equipment, suffer from muted growth of industrial production. Indeed, the latter lost its momentum in mid-2018 and delivers weak dynamics since then. In the first nine months of 2019, industrial production increased by 0.3% compared to the same period of the previous year. Considering the gloomy sentiment expressed by manufacturing businesses, a surge of investments is unlikely. The weakness of investments and concerns over exports have been a result of slower demand from the main Western European trade partners, weaker global demand through the country’s inclusion in various supply chains and delayed adoptions of new emission standards by car producers. In the production approach, the Czech economy is driven by manufacturing of vehicles. Considering also supplying industries, the automotive sector generates more than 9% of total gross value added and accounts for over 8% of the total employment, and above 26% of exports. Despite the challenges of the external situation, net exports are expected to positively contribute to GDP growth, as weaker investments and production will make imports growth slower.

Since August 2017, the Czech central bank has been gradually raising its interest rates, with the last move made in May 2019. The Czech National Bank seems to be more sensitive to a rising inflation than peers’ central banks. However, it is expected that Czech National Bank’s inflation target will be again slightly exceeded in 2020.

Solid fiscal position

The fiscal policy is likely to be used as a pro-growth stimulus when facing weaker economic activity. Czechia will record a budget deficit this year. Although expected to reach a low level, it will nevertheless reverse a previous trend of budget surpluses. Indeed, a budget surplus in 2019 was the fourth consecutive when revenues were higher than expenditures. Public wages, pensions and subsidies already made expenditures grow last year and are to increase again this year. Furthermore, in the final year of the current EU structural funds program, robust public investments will partly require domestic financing. Revenues will benefit from an increase in excise duties for alcohol and tobacco products, and the introduction of a new digital services tax for large corporations.

At the end of the first half of 2019, the current account surplus was 0.7% of GDP and the goods and services surplus reached 6.3% of GDP. The financial account recorded an outflow of funds due to assets rising faster than liabilities. Despite the growing interest rate differential with the Eurozone, the Czech koruna has not been appreciating in nominal terms versus the euro. It is expected to remain stable.

ANO survives no-confidence votes but protests put pressure

The ANO 2011 (center-right) movement led by Andrej Babis won the October 2017 elections by a large margin, obtaining 30% of the votes cast, and 78 out of 200 seats in parliament. Nevertheless, the traditional parties refused to enter into a coalition with this party, of which the leader has been charged with 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). The recent cabinet consists of the coalition between ANO and the CSSD (which is supported by the Communist party). In late 2019, a series of demonstrations were held across the country, sparked by the sudden replacement of the justice minister, days after police recommended Andrej Babis be charged with EU subsidies fraud. With further social discontent, early elections are possible before the regular ones scheduled for October 2021.

Last update : February 2020

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.