Loss of interest from investors

Foreign direct investment (FDI), one of the key economic indicators for the Czech Republic, plummeted more than 50 percent last year, but analysts have been quick to defend the buoyancy of the Czech economy and banking system and say that the decline is short-term and expected.

The United Nations Conference on Trade and Development (UNCTAD) published its annual report July 22, which revealed the Czech Republic attracted 52 billion Kč in FDI in 2009, down from 110 billion Kč a year earlier. Almost 70 percent of all Czech industrial companies are backed by FDI, making the continuance of foreign support particularly key for the domestic economy.

Gábor Hunya, FDI expert for the CEE region at the Vienna Institute for International and Economic Studies, said the Czech Republic did not perform exceptionally poorly over the past year but that all new member states "were seriously hit by FDI decline in 2009."

"The recent FDI decline in the new member states ought to be seen in the context of the very high FDI intensity attained in these countries. The foreign sector is important, often dominant in several sectors of the new member state economies. It contributes essentially to the overall economic growth performance in general and participated particularly in the severe declines in several countries of the region in 2009," he said.

Local economic analysts blame the decrease in FDI to paradigm shifts in the local economy as well as the behavior of investors throughout the world. Petr Sklenář, investment analyst at Atlantik FT, highlighted three probable causes for the FDI drop, including greater investment interest in Southeast Asia and Latin America, rather than Central and Eastern Europe, which was the favored investment arena at the turn of the century.

"We've reached a saturation point in manufacturing investments, and the state has already sold all its assets in privatization," he said. "Another possible influence is large companies in the Czech Republic diverting cash flow into their parent companies."

The result of this behavior can be seen especially in Slovakia, where FDI actually went into negative numbers last year as investors began sending more profits back home to parent companies.

Germany and the Netherlands are the countries that invest most heavily into the Czech economy, albeit for different reasons. One-third of Czech exports are destined for Germany, the Czech Republic's largest trading partner. Investment from the Netherlands is rooted in that country's laxer system of taxation, leading many investors to operate holding companies based in the Netherlands. Therefore, any economic declines in those countries will be reflected in the Czech economy.

The European recession hasn't done any favors for the Czech economy, which is particularly sensitive to fluctuations on foreign markets, both through FDI and exports, Sklenář said.

"But in general, this decline in FDI isn't the end of the world. It's a gradual development and one that was expected, because the massive inflow of investment that took place in the previous decade simply wasn't sustainable," he said.

FDI to the Czech Republic has increased slightly to 53 billion Kč in the first quarter of 2010, and Hunya expects this trend to continue over the next year, with the Czech Republic being one of the leading economies in the region, though he warns, "forecasting the amount of FDI inflows for 2010 is not really feasible in the present circumstances."

"We nevertheless make an attempt based on global trends and the results in the first quarter of 2010," Hunya added. "Thus, we expect FDI inflows to modestly increase in the [CEE] region as a whole. The Czech Republic is expected to contribute to the revival of FDI."

Stephan Delbos can be reached at
sdelbos@praguepost.com