Latest data indicates that Europe is finally pulling out of recession, led by Germany. This will be viewed with universal relief, especially so in the Czech Republic and other eastern EU states, where trade with the rest of the EU – especially Germany − is all-important.  

However, the effects of the economic crisis combined with ongoing concerns regarding the Eurozone remain an obstacle to growth in the Czech Republic and the rest of ‘Emerging Europe’. The Czech economy is forecast to experience little or no growth in the second half of 2013, with private consumption predicted to deteriorate further, before a gradual pick-up that is predicted for 2014.

Having joined the EU in 2004, there has been little enthusiasm among either Czech politicians or the public to embrace greater integration too closely, which includes any prospect of adopting the euro. Current president Miloš Zeman claims to favour closer integration but believes the country should not rush to join the euro.

Following Zeman’s election in January 2013 there has been a period of political upheaval, with the coalition government of Petr Nečas self-destructing in June under the weight of corruption scandals and the succeeding regime under Jiří Rusnok falling in August when parliament voted for dissolution. A snap election will be held towards the end of October, although the outcome and potential effect on the economy are hard to forecast.

One thing is certain: a return of political order and stability will provide a much needed boost to economic and business confidence. The markets desperately need to see investment returning, and the current uncertain environment is one in which few are willing to invest.

However, the basis for recovery is there: the Czech economy is established as the second most important in Central and Eastern Europe (CEE), behind Poland; it has strong fundamentals, good creditworthiness, and a structure that is open to foreign trade and investment – looking ahead, it has an underlying business environment that is well rated and should thrive.

For the near term, the problem of lack of liquidity remains, with small and medium-sized enterprises (SMEs) feeling the strain most acutely. This segment forms the bulk of the economy, but has suffered as the main source of finance – bank loans – has been restricted. A return to easier access to this method of credit may be some way off as, if the slowdown continues, the banking sector could see an increase in credit losses at the same time as a decline in the means to generate income to cover those losses, thereby continuing the constraint on loans to SMEs.

This would normally be a situation in which asset finance, through alternative funding methods such as leasing, might benefit. However, this market was badly hit by the recession and despite a slight revival in 2010-11 it suffered further in 2012 thanks to the ongoing problems in other EU countries. In addition, the industry has felt the impact of changes to taxation of leases, instigated before the recession, which meant longer minimum contract terms and the end of shorter depreciation terms on leased equipment.

One positive outcome of this has been that it has encouraged leasing companies to develop their own loans structure as an alternative funding method to leasing, which has proved relatively popular. This form of ‘credit finance’ is similar to bank loans but it is still provided with the prime aim of asset acquisition.

If a new government introduces the pro-growth measures that have so far only been talked about, such as changes regarding tax depreciation on investment, these could have a positive impact for lessors. One area the industry is working on improving is the need to develop processes that optimise efficiency and cost savings.

At present, the Czech leasing market remains subdued, with low levels of demand, particularly for machinery and equipment, although there are signs at the beginning of the second half-year that new business volumes are picking up again. Confidence is gradually growing among Czech SMEs, which tend to show a greater preference for using non-bank financing such as leasing than their counterparts in other CEE countries. It is this sector that has the greatest opportunity for growth and will underpin the country’s economic revival, and that of the asset finance market.

The White Clarke Group Czech Republic Asset and Auto Finance Country Survey is available to download here:

http://www.whiteclarkegroup.com/knowledge-centre/category/country_reports/czech_republic_asset_and_auto_finance_country_survey