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Compliance Risk Assessment: Czech Republic

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The Czech Republic’s political and economic outlook remains somewhat shaky, affecting corporate payment behavior and default probability. According to Coface, corporate default probability is still acceptable on average.

Business Climate

In terms of business climate, the country rates A2, with a good environment for companies. Corporate financial information is reliable, debt collection is efficient, and institutions perform well. Intercompany transactions typically run smoothly in this stable environment.

Strengths

Attractive Destination for Foreign Direct Investment

The Czech Republic’s central location in industrial Europe makes it an attractive destination for foreign direct investment (FDI). Its significant industrial potential, robust public accounts, and banking system are also major advantages.

Weaknesses

Small, Open Economy with High Dependence on European Demand

However, the country’s small, open economy makes it heavily dependent on European demand. Exports account for 80% of GDP, with 64% going to the Eurozone and one-third to Germany. The automotive sector is a significant contributor to the economy, but supply chain disruptions pose a risk.

The Czech economy has been recovering from the pandemic-induced downturn, driven by easing restrictions and economic growth. However, the recovery pace has been insufficient to return to pre-pandemic levels in 2021. Supply chain disruptions have become a crucial drag on growth, particularly in the automotive sector.

Exports and Manufacturing Sector

Exports to Germany are crucial for the country’s manufacturing sector, which is also driven by demand from the German economy. Household spending is expected to remain robust due to increased disposable income and a favorable labor market. Labor shortages and rising costs of inputs will continue to affect companies, driving inflationary pressures.

Fiscal Consolidation

The budget balance is expected to improve in 2022 as pandemic support measures are withdrawn. However, some measures, such as the decrease in personal income tax, will still affect revenue. Public debt remains moderate, but has increased during the pandemic.

New Government

In October 2021, a five-party coalition won the parliamentary elections, with the conservative Civic Democratic Party (ODS) leading the government. The new government has declared several priorities, including balancing the budget by cutting welfare expenditures and increasing spending on research and development, digitalization, and infrastructure projects. Managing the pandemic and fiscal budget are its most urgent concerns.

Risk Assessment

The Czech Republic’s compliance risk assessment is complex, with both strengths and weaknesses influencing corporate payment behavior and default probability. Companies operating in this market should be aware of the country’s economic and political risks to ensure effective risk management strategies.

Key Risks to Consider

  • Economic and political uncertainty
  • Dependence on European demand
  • Supply chain disruptions
  • Inflationary pressures
  • Fiscal consolidation measures