FACTBOX-Key political risks to watch with new Czech government

By Jason Hovet

PRAGUE, July 1 (BestGrowthStock) – Newly-appointed Czech Prime
Minister Petr Necas is set to lead a three-party, centre-right
coalition that could have the strongest majority of any
government since the country split from Slovakia in 1993.

The three parties — the right-of-centre Civic Democrats,
the conservative TOP09 and the centrist Public Affairs — have
118 of the 200 seats in the lower house after winning a May
election with pledges of austerity and battling corruption.

Necas wants a coalition agreement by early July, and the
parties cleared a major hurdle on Wednesday with an agreement on
allocating cabinet posts, giving the important finance ministry
portfolio to TOP09.

Following are some key risks the expected government faces.

COALITION BUILDING

The harmony of the coalition could be tested often.

The new party TOP09 was created last year by political
veterans who are shrewd negotiators. The party won 16.7 percent
of the vote in May elections at the expense of coalition leader
Civic Democrats, who will not want to be upstaged by TOP09.

The Civic Democrats, with 53 parliament seats, initially
resisted proposals to give the important finance minister post
to TOP09 Vice-Chairman and former finance minister Miroslav
Kalousek.

Public Affairs, entering parliament and the national stage
for the first time, is a wild card on many issues.

Chairman Radek John once described the party as neither
left- or right-leaning, but whatever best suits the country.
They have said they may not end up in the coalition but could
support it in parliamentary votes.

What to watch:

— Coalition talks could still unravel with Public Affairs
pulling out and leaving a weaker minority cabinet, although that
probability is not high. Public Affairs could stay unpredictable
in or out of the government.

— Will the Civic Democrats be upstaged by TOP09 and its
role in the Finance Ministry? This office will take the lead on
cutting the budget and managing state assets. Necas said on
Wednesday he would head up tax, pension and health reforms.

FISCAL POLICIES/OUTLOOK

The parties have agreed on 54 billion crowns ($2.57 billion)
in budget savings for 2011, and aim for a fiscal gap around 4.6
percent of gross domestic product, down from 5.3 percent planned
for 2010.

They also want to raise 20 billion crowns in new revenue
through scrapping planned tax cuts to meet this target, but have
avoided using new or higher taxes.

Analysts and the outgoing finance minister have warned
savings should come from a mix of spending cuts and tax rises.

The other parties met Public Affairs’ demands last week to
find more money for teachers by cutting defence spending.

Czech public debt is half the European Union average at 35.4
percent of GDP — up from 29 percent in 2007 and rising fast,
due largely to rising debt costs and structural problems exposed
in the economy’s 4 percent contraction in 2009.

The Finance Ministry expects the export-reliant economy to
rebound around 1.5 percent in 2010 and 2.4 percent in 2011.
However, austerity across Europe could dampen demand for
Czech-made goods, hitting recovery and government coffers.

The IMF and OECD have warned Prague it must reform its
pension, health and welfare systems. Analysts say these reforms
can fix long-neglected problems that could pose a medium-term
threat to the ‘A’ credit score from rating agency S&P.

What to watch:

— The 2011 budget will set the pace of fiscal consolidation
and how quickly the country will move back to the EU’s 3 percent
of GDP ceiling, targeted in 2013 by the last caretaker cabinet.

— The right-leaning parties will resist tax hikes as much
as possible but may have to give ground to avoid drastic
spending cuts.

— Analysts say cuts that are too harsh could slow recovery
or cause a double dip, as the economy is still saddled with weak
domestic demand. Austerity elsewhere should hurt export demand.

— The parties have similar, but varying views on pension
reform and any agreement could be watered down.

DISAPPOINTED WORKERS

Czech unions are much weaker than in other central and
eastern European countries like Romania, and the government has
faced very few labour protests this decade.

But unions, allied with the opposition Social Democrats,
could show more muscle amid government plans to slash a number
of employee tax breaks and cut public sector wage spending.

This year, transport workers forced caretaker PM Jan Fischer
to back down from a minor tax hike on railway workers’ benefits.

What to watch:

— Unions are waiting for government plans to be put on
paper before threatening any action.

— Protests against austerity in western Europe could
influence Czech unions.

— The centre-right parties still have political capital
after a strong election win on austerity pledges.

ENERGY POLICY

The next government will see through the country’s
largest-ever power tender, and will also set policy on the
country’s future energy mix to meet climate goals and to ensure
security of supply.

Power firm CEZ (CEZPsp.PR: ), central Europe’s biggest firm,
with a market capitalisation of $22.5 billion, is 69.8 percent
state-owned and a significant source of government revenue.

CEZ has opened a tender to build two units at its Temelin
nuclear power plant near the Austrian border, and possibly three
more at another domestic site and in Slovakia.

Areva SA (CEPFi.PA: ), Toshiba Corp’s (6502.T: ) Westinghouse
Electric, and Russia’s Atomstroyexport are competing for the
deal that could be worth some $24 billion.

The outgoing cabinet has appointed Vaclav Bartuska as its
envoy for the tender. Bartuska, who has said he has the
centre-right parties’ approval, has spoken sharply against
furthering the country’s energy dependency on Russia.

What to watch:

— Government involvement in the tender.

— The government may sell some of the CEZ stake. The Civic
Democrats have not ruled this out, but have no concrete plan.

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

FACTBOX-Key political risks to watch with new Czech government