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FY 1999: Czech Republic |
CHAPTER VIII. TRADE AND PROJECT FINANCINGA. Banking System
Banking sector reform continues to be a priority for the Czech Republic. Financial observers agree that legislative reform and completion of the privatization of state-owned banks are necessary structural steps for a strong sustainable economy. While progress has been slow, the process of reform is moving forward.
Recent legislative changes include an amendment to the Czech banking act that separates investment banking from commercial banking, and limits bank ownership stakes in nonfinancial companies. Another amendment further strengthens the Central Bank's supervisory authority and tightens the standards for bank management. A new banking law is now being written which should further harmonize banking operations with EU standards.
A major problem facing the Czech banks is bad debt, which has only been worsened by delayed privatization of the state-owned banks. While the Czech government has already sold its 36% stake in the country's third largest bank, IPB (Investment and Postal Bank), to the Japanese investment bank Nomura, plans for selling off government stakes in the remaining "big three" Czech banks-Komercni (Commercial Bank), CSOB (Czechoslovak Trade Bank), and Ceska Sporitelna (Czech Savings Bank)--are still in the early stages. These three banks collectively hold more than $20.9 billion. To guide each bank through the privatization process, the government has selected a pair of financial advisers (one Czech and one Western) for each bank. CSOB is first in line to be sold, and while the privatization scheme remains in motion during the summer of 1998, continuation of the process will depend on the political will of the incoming government.
Regarding specific operations, some Czech commercial banks currently carry out activities in addition to traditional commercial transactions and lending, subject to the issuance of a license by the CNB. This is different from American banking practices, but closely resembles European banking law. The result of universal banking is that clients can obtain brokerage, investment advisory and underwriting services from the same institution that handles their deposits and provides them with loans. However, many of these services are new to domestic Czech banks and efficient, integrated service is still developing. Foreign banks and branch offices of foreign banks have increased their activity over the past several years and continue to increase their share of the total Czech banking sector.
Several U.S. financial institutions, including Citibank, Bankers Trust and Chase Manhattan have offices in the Czech Republic. In the spring of 1998, General Electric Capital Services bought Agrobanka, once the largest private Czech bank. Agrobanka had been put under forced administration in 1996, and was ultimately sold to GE Capital, but only after the state had taken over most of the bank's bad debt.
Computerized banking systems are used in the Czech Republic and corporate checking accounts and debit cards are offered by foreign banks as well as by large domestic banks such as Komercni Banka and CSOB.
In practice, most payments are made by bank transfer; checks are rarely used. Computerized systems have helped to speed payments and transfers of funds which used to take up to a week, but now have been reduced to a day for internal bank transfers and about three days for domestic transfers. In addition, transfers between the major Czech banks and large banks in the U.S. now usually take less than a week.
Foreign banks in the Czech Republic can take three legal forms: representative offices, full-fledged branches or partially or wholly-owned subsidiaries. Representative offices can offer advice and inform clients of services available through the parent bank as well as provide off-shore services out of their overseas entities. They are not authorized to perform services locally such as opening accounts or lending. Branches can handle any transaction which is authorized by the parent bank and for which they have a local license. Subsid- iaries function as an independent bank. Czech banking law requires that all foreign banks having branches in the Czech Republic agree to take over the assets and liabilities if the branch experiences financial problems to guarantee the financial health of the branch.
Foreign banks are now effectively targeting Western clients as well as "blue-chip" local firms and are providing a wide range of commercial and investment banking services. These services include corporate finance, trade services (such as letters of credit and export and import documentation) and risk management (such as foreign currency risk, interest rate risk, and related derivatives). In addition, providing current market and investment climate information for clients has recently been targeted as a necessary part of total banking services.
B. Foreign Exchange Controls affecting Trading
In the fall of 1995, Parliament approved a Foreign Exchange Act which resulted in expanded convertibility of the Czech crown. The Act provided for full current account convertibility. Capital account transactions, such as Czech foreign direct investment and the purchase of property abroad are allowed but previous restrictions that limit the rights of foreign persons (including legal persons) to own real estate in the Republic continue to apply. However, Czech legal entities do not have to obtain approval from the Czech National Bank for foreign borrowing.
In May of 1997, the CNB board canceled the fluctuation band for the Czech crown's exchange rate (which had been set at +/-7.5% in February 1996). The board also decided to abandon the previously used currency basket(65% German Mark (DEM), 35% US) and peg the crown to the DEM. At the time of this writing (July 1998), the exchange rate was roughly 33 crowns to the U.S. dollar.
C. General Financing Availability
Generally, smaller Czech firms find it difficult to arrange financing and obtain credit. Although smaller sales of U.S. goods up to about $50 thousand are common and do not present any particular problems, above this threshold many small Czech businesses cannot afford or cannot secure financing. It is hoped that the future development of more medium-sized banks in the Czech Republic will help to remedy this situation.
D. How to Finance Exports/Methods of Payment
Most Czech firms are familiar with the most common methods of international payment such as letters of credit, documentary collections, and wire transfer/cash in advance. Most would prefer not to use a letter of credit due to its high cost especially in the case of smaller shipments. The most common methods are prepayment or partial prepayment with the balance due upon delivery or net 30 day terms. On very small shipments (under $2,000) exporters might even consider allowing the buyer to pay by credit card which is being used more and more frequently in the Czech Republic. To compete with European suppliers, American exporters should be willing to work with their Czech buyers to provide flexible payment terms. In this regard, the export working capital programs provided by the Small Business Administration, as well as export credit insurance offered by the Export-Import Bank, may be helpful in allowing U.S. exporters to offer more generous credit terms to their Czech customers (see below).
E. Types of Export Financing and Insurance
1. The U.S. Small Business Administration (SBA) has a number of programs targeted toward helping small and medium-sized companies to develop export markets. In particular, SBA offers an export working capital guarantee program, whereby SBA will guarantee up to 75% of a bank loan to provide working capital or a line of credit to exporters. This, in turn, can enable exporters to offer more favorable payment terms to their Czech buyers or provide working capital while export orders are being manufactured.
Contact: In Washington, U.S. Small Business Administration, 409 Third Street, SW, Washington, DC 20416, Sheldon Snook, Office of International Trade, Tel. (202) 205-6720, Fax: (202) 205-7272, or call 1-800-USA-TRADE for the location of your nearest U.S. Export Assistance Center.
2. The U.S. Export-Import Bank (EXIM) promotes the export of U.S. goods and services through a variety of loan, guarantee, and insurance programs. All of its programs are available for the Czech Republic. EXIM can guarantee U.S. commercial bank financing for U.S. exporters and provide lines of credit to Czech buyers through major Czech banks. Its export insurance programs provide insurance coverage against the risk of default on foreign receivables. In 1995, EXIM signed a co-financing agreement with the Czech Export Bank (CEB). The agreement targets projects that use both U.S. and Czech suppliers for products sold to a third country. The CEB and EXIM are currently working on several cooperative projects, but at the time of this writing, details were not yet available.
Contact: Export-Import Bank of the United States, 811 Vermont Ave., NW, Washington, DC 20871; (800) 565-EXIM (3946) International Business Development Division Tel.: (202) 565-3900 Fax. (202) 565-3946; International Lending Fax:(202) 565-3816, or call 1-800-USA-TRADE for the location of your nearest U.S. Export Assistance Center.
Contact: Czech Export Bank; Commercial and Marketing Department, Miroslava Hrncirova, Deputy Manager; Vodickove 34, Prague 1; Tel.(420-2) 2284-3111 Fax.(420-2) 296-114.
3. The U.S. Trade and Development Agency (TDA) is an independent U.S. government agency which promotes U.S. exports for major development projects in middle-income and developing countries. TDA funds feasibility studies, consultancies, training programs, and other project planning services related to major projects. Consultancy contracts funded by TDA grants must be awarded to U.S. companies. U.S. involvement in project planning helps position potential U.S. suppliers to take advantage of follow-on contracts when these projects are implemented. TDA has been very active in the Czech Republic in the environmental, telecommunications, energy, petrochemical and information management industries. CS Prague works closely with TDA and with Czech and American firms to identify potential projects.
Contact: U.S. Trade and Development Agency, Rod Azama, Regional Director; SA-16 - Rm. 309 Washington, DC 20523-1602; Tel. (703) 875-4357; Fax (703) 875-4009; e-mail info@tda.gov
4. The Overseas Private Investment Corporation (OPIC) is a self-sustaining, U.S. government agency which encourages U.S. businesses to invest in developing countries and emerging market economies. OPIC's key programs are its loan guarantees, direct loans, and investment insurance against foreign political risk. For Eastern European countries, OPIC also offers an Eastern European Growth Fund, designed to match OPIC funds with private venture capital to finance new businesses, the Small Business Loan Guarantee Program, and an environmental investment fund.
Contact: Barbara Brereton, Manager of Central and Eastern Europe, Tel. (202) 336-8617 Fax. (202) 408-5145 Program Information: Tel. (202) 336-9700 Fax. (202) 408-5155 Mailing address: OPIC, 1615 M Street, NW, Washington, DC 20527.
F. Project Financing Available
1. International Finance Corporation (IFC) has cooperative agreements with local Czech institutions and can provide services including financing from commercial banks, export credit agencies and other institutions. The focus of this financing is on energy (and related environmental infra- structure), telecommunications, transportation infrastructure, and the steel industry.
Contacts: In Washington, Harold Rosen, Chief of European Dept.; Tel. (202) 473-8841; Georgine Baker, Senior Investment Officer, tel. (202) 473-3175, fax (202) 974-4314. Mailing address: IFC, Europe 1 Dept., 2121 Pennsylvania Ave. NW, Washington DC 20433. In Prague, Milos Vecera, Tel. (420-2) 2440-1402; Fax (420-2) 2440-1410; Mailing address: International Finance Corp., Husova 5, 110 00 Prague 1, Czech Republic.
2. The Multilateral Investment Guarantee Agency (MIGA) is part of the World Bank group. Its purpose is to encourage foreign direct investment in developing countries by providing investors with political risk insurance. Like its counterpart OPIC, MIGA provides insurance to cover the risk of currency transfer, expropriation, war, and civil disturbance, and breach of contract by the host government. The Czech Republic is a member of MIGA.
Contacts: In Washington, Multilateral Investment Guarantee Agency, 1818 H Street, NW, Washington, DC 20433, Mr. Leigh Hollywood, Vice President, Guarantees Tel. (202) 473-6168, Edward Coppola, Manager: Eastern Europe Tel. (202) 473-5419, Fax (202) 477-9886.
3. The European Bank for Reconstruction and Development (EBRD) was set up to promote private and entrepreneurial initiatives in the Central and Eastern European countries. EBRD supports private sector development, environmental clean-up, and infrastructure development. Like the IFC, EBRD can either work independently, or arrange co-financing packages in conjunction with other multilateral government and private institutions.
U.S. companies are eligible to compete and bid on all EBRD- financed projects. Foreign joint ventures are one of the EBRD's main vehicles for financing.
Contacts: In London, EBRD, One Exchange Square, London EC2A 2EH, U.K.; U.S. Department of Commerce's Senior Commercial Officer, Dean Petersen, Tel: (44-171)338-7532, Fax: (44-171)338-6487, e-mail petersod@ebrd.com; Jiri Heubner, Team Leader, Czech and Slovak Republics, Tel. (44-171)338-6001. In Prague, Mr. Igor Ocka and Mr Joaquim Gefaell, Co-Directors of Resident Office, Tel: (420-2) 2423-9070; Fax: (420-2) 2423-3077 Mailing Address: Karlova 27, 110 00 Praha 1, Czech Republic.
4. European Union (EU), PHARE, The EU's PHARE program in the Czech Republic focuses on pre-accession to the European Union. PHARE funding is being used for social and economic development, strengthening of the legal and institutional framework and infrastructure integration with the EU especially in transport, energy and the environment.
Contacts: In Brussels, Mr. Philippe Bourel, Division for International Affairs, Directorate General for Environment, Nuclear Safety, and Civil Protection (DG-XI), Commission of the European Union, Room 10/248, 45 Avenue d' Auderghem, 1040 Brussels; Tel. (32-2) 235-3851; Fax (32-2) 235-5665.
In Prague, Stephen Collins, Director, Tel.(420-2) 2431-2835, Fax (420-2)2431-2850, 2432-0810.
G. List of Banks with Correspondent U.S. Banking Arrangements
Ceskoslovenska Obchodni Banka Ms Jana Svabenska, International Financing Na prikope 14 115 20 Praha 1 Tel. (420-2) 2411-1111 Fax. (420-2) 2422-5049
Citibank William Rocca, Corporate Finance Evropska 178 160 00 Praha 6 Tel. (420-2) 2430-4111 Fax. (420-2) 2430-4613 Komercni Banka Ms Olga Cudova, International Financing Na prikope 33 114 07 Praha 1 Tel. (420-2) 2243-2111 Fax. (420-2) 2422-9359 Zivnostenska Banka Mr Johann Hombach, Project Financing Na prikope 20 113 80 Praha 1 Tel. (420-2) 2412-1111 Fax. (420-2) 2412-5555
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