Czech Republic: Risk Assessment

Country Risk Rating

A3 Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average.

Business Climate Rating

A2 The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in the relatively stable environment rated A2.


  • Central geographic position, at the heart of industrial Europe
  • Highly integrated into German production chain
  • Significant industrial potential (38% of GDP)
  • Significant local added value (55% of the value of exports)
  • Robust banking system
  • Low external energy dependence


  • Decline in the economically active population and low female employment rate
  • Small, very open economy with exports equivalent to 80% of GDP
  • Exports highly specialized geographically and by sector
  • High correlation with German economic cycle
  • Insufficient research and development and transport infrastructures
  • Lack of competition and clientelism 

Current Trends

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Dynamic activity despite cyclical downturn

Household consumption (48% of GDP) will still make a strong contribution to growth. Employment will continue to rise and the reduction in the availability of skilled workers will encourage wages to rise. In addition, the State is expected to increase retirement pensions and civil service salaries. Conversely, the contribution of investment (25% of GDP) will be well below that of 2015, causing growth to slow. Indeed, while the property market in the large urban centers like Prague and Brno is expected to benefit from cheap credit, public construction of roads and railways is expected to report a sharp decline following a jump in 2015 with the expiry of the European funds for the 2007-2013 period. Moreover, business investment could slow more significantly than forecast if the Volkswagen scandal widened and reverberated on its local Skoda subsidiary, a major player in the Czech automotive industry (10% of GDP) and the country's leading exporter. However, the final impact on growth is likely to be weak at worst. Despite the modest recovery in Europe (80% of exports), exports of automotive parts and vehicles, machine and electronics (these three segments alone accounting for half of sales) are likely to slow if the central bank abandons the ceiling for the koruna against the euro (CZK 27 for 1 euro since 2013). However, at the same time, the downturn in investment will also curb imports.

A satisfactory budget position

Despite higher public-sector wages and pensions, and the increase in resources directed towards early childcare and research, the public deficit, already low, is expected to decline in 2016. This will be made possible by continuing with the fight against tax evasion, by, for example, remote electronic monitoring of cash tills, (temporarily) cutting investment in transport infrastructures, reducing the cost of debt (issuance of 10-year bond at 0.67% in September 2015) and by dynamic consumption. This trend comes after the adoption in 2015 of several budget accountability measures, such as the obligation to take action when the debt burden reaches 55%, the establishment of an independent budget committee and the setting of a structural deficit target of 1% (currently 1.5%) in 2018 sufficient to ensure that the debt, 80% of which is denominated in koruna, stabilizes at a modest level. The government of Prime Minister Bohuslav Sobotka has a comfortable parliamentary majority as a result of the October 2013 elections, composed of his own Social Democrat Party (25% of the seats), the centrist ANO Party (24% of the seats) created in 2011 by Finance Minister Andrej Babis as a reaction against the corruption scandals and the center-right Christian Democrats (7% of the seats), against an opposition split between the right and the communists. The coalition is expected to remain stable until the 2017 elections, with budgetary austerity favored by the one side accompanied by social advances supported by the others. The adoption of the euro, despite the criteria being satisfied, is not expected in the near term.

Large trade surplus

The small current account surplus encompasses a large trade surplus (almost 7% of GDP) and a slightly smaller income deficit linked to dividend repatriation by foreign companies, first among them being Skoda. Tourism income, despite fewer Russian visitors, road transport and IT services contribute strongly to the surplus on services. European funding represents about 0.8% of GDP a year. Foreign direct investments (about 3% of GDP) are largely composed of profits re-invested locally, thus consolidating the position of Czech industry in the European and, in particular, the German production chain, and giving autonomy over management and technological inputs to local subsidiaries. Prague is seeking to attract investment in the disadvantaged regions. FDIs are partially offset by Czech investments abroad. 49% of external debt (68% of GDP at the end of June 2015) is owed by non-financial enterprises and 28% by domestic banks, which reflects the dominance of European banking groups. However, the local subsidiaries have a local deposit base which largely covers their loans and have not been hit by the crisis.


Coface (09/2016)