FACTBOX-Key political risks to watch in Czech election

By Jan Lopatka

PRAGUE, May 4 (BestGrowthStock) – The Czech Republic will hold a
general election on May 28-29 that looks likely to bring the
centre-left Social Democrats to power after a four-year hiatus,
handing them the task of slashing a crisis-inflated budget gap.

The election could break a deadlock that has crippled
policymaking in the central European country since an election
produced a hung parliament in 2006.

But polls show that no strong government is likely to
emerge, owing to the fine balance between left and right-leaning
voters, and a minority government is a possibility.

Here are key issues to look for:

VOTE RESULTS AND COALITIONS

The Czechs have not had a government with a clear majority
for more than a decade and vote results tend to be close,
leading to weak governments and frequent policy deadlocks.

The Social Democrats hold a 7-9 percentage point lead over
their main rivals, the centre-right Civic Democrats, but will
almost certainly need coalition partners to control a majority
of parliament’s 200 seats. [ID:nLDE63K1IE]

If they fail to find partners in the political centre, they
could form a minority government backed by votes of the far-left
Communists, a party which is deemed unacceptable by most in the
political spectrum and which has not had any share in power
since the end of its totalitarian rule in 1989.

A close result could lead to a grand coalition of the two
biggest parties, the Civic Democrats and the Social Democrats,
which analysts say could hamper decisive reforms because of
their very different agendas.

The success of new small parties, derived from voter
dissatisfaction with a series of graft scandals in the main
parties, could alter the picture, possibly opening the way for a
centre-right coalition. Some of the small parties have been
gaining strength in recent polls.

What to watch:

— A close result could unnerve markets and lead to lengthy
coalition-building, possibly a grand coalition.

— If the Social Democrats and the Communists between them
win more than half of the seats, a minority Social Democrat
cabinet backed by the Communists is possible. This would be the
least market-friendly scenario for fears of loose fiscal policy
and higher taxes.

— If the two combined win less than half of the votes, a
centre-right coalition of the Civic Democrats and the small
parties is possible. This would likely lead to pro-business
policies and fewer tax hikes but questions would remain about
the ability to cut the budget gap.

— The Social Democrats could also form a coalition with the
smaller parties of the centre or centre-right. But some of those
parties have been icy toward them.

— If small parties pass the 5 percent threshold for winning
seats in parliament, this will be an important factor in
coalition-building.

FISCAL POLICIES

The Social Democrats have pledged to hike taxes on firms and
higher wage earners to cut the budget gap to 3 percent in 2013
from 5.9 percent last year and enter the euro zone in 2015 but
promise a generous welfare agenda.

Analysts say taxes will not be enough to help balance a
budget that faces pressures from the financial crisis — the
economy shrank by 4.1 percent in 2009 — and more importantly is
weighed down by long-neglected structural problems which pose a
medium-term threat to the country’s ‘A’ rating from S&P.

The IMF and OECD have warned Prague it must reform pension,
health and welfare, and changes should focus on spending rather
than tax. [ID:nWAT014178] [ID:nLDE6350G0]

The Civic Democrats have said they would not raise taxes and
have promised to cut the budget deficit to 3 percent by 2012 via
spending cuts. They pledged to balance the budget by 2017.

Fiscal tightening is key to taming the growing debt pile,
which is expected to reach 39 percent of GDP this year, up from
29 percent just two years ago but still half of the EU average.

What to watch:

— Social Democrats may scale back welfare plans to help the
budget but the entry target may still slip. The strong crown
currency has in the past weathered postponements of euro entry
targets, but lack of fiscal consolidation could spook investors.

— Coalition partners may limit the left’s tax hike plans.

— The 2011 budget, which will define the speed of fiscal
consolidation.

— Pensions. The left rejects the need to reform the system
which analysts and international institutions say is headed for
ever greater deficits.

ENERGY POLICY AND REGULATION

The Social Democrats have lashed out at utilities, promising
to bring down power prices through tougher regulation. They have
also said they would tighten regulation of telecoms and push for
lower bank fees.

Power firm CEZ (CEZPsp.PR: ), central Europe’s biggest company
with market capitalisation of $26 billion, is almost 70 percent
state-owned and a significant source of government revenue.

The Social Democrats have said they would raise dividend
payments to fund a one-off bonus to pensioners.

CEZ is also running the biggest tender in the country’s
history to order up to five nuclear power station units.

The government will play a crucial role in the deal,
estimated by Czech media as worth 500 billion crowns ($26.16
billion) and may influence which of three bidders — Areva SA
(CEPFi.PA: ), Westinghouse Electric, a unit of Toshiba Corp
(6502.T: ), and Russia’s Atomstroyexport — wins the project.

What to watch:

— Proposals for higher CEZ dividends.

— Political involvement in nuclear tender.

— Pressure on power and telecoms prices through regulation.
This could hurt CEZ, E.ON (EONG.DE: ) and other players but
analysts have doubts the Social Democrats will be able to make
substantial changes to the market framework.

Investing Basics

For political risks to watch in other countries, please
click on [ID:nLDE6430Y1]
(Editing by Sonya Hepinstall)

FACTBOX-Key political risks to watch in Czech election