By Jan Lopatka
PRAGUE, June 1 (Reuters) - Centre-right parties scored a
surprising victory in last weekend's Czech election, opening the
possibility of bold reforms aimed at narrowing the budget
deficit and fixing creaking healthcare and pension systems.
The Czech Republic has a relatively low public debt burden
by European standards, at 35 percent of gross domestic product,
but that is seen rising fast unless the next government reins in
spending and revamps welfare.
The following are key political risks investors may face in
the central European country of 10.5 million people:
COALITION BUILDING
Three centre-right parties -- the Civic Democrats, the
conservative TOP09 and the centrist Public Affairs -- won 118 of
the 200 lower house seats in the May 28-29 election, the most
for a potential coalition since the country was created in 1993.
Talks on a government are only just beginning. While all
sides say they are keen to reach a deal, it is not certain they
can find common ground on all issues.
The TOP09 and the Civic Democrats have very similar views on
the need to cut state spending and revamp the pension system,
but Public Affairs has threatened not to join the cabinet unless
its anti-corruption demands are not met.
The upstart party has no track record in politics and has
been criticised as unpredictable. It also has few experts to
fill government posts.
What to watch:
-- Setbacks in coalition talks, especially Public Affairs
manoeuvring.
-- A failure of coalition talks could lead to a minority
right-wing cabinet, backed informally in parliament by Public
Affairs. This would be a much weaker arrangement and could
hamper policymaking.
-- An alternative coalition including the leftist Social
Democrats could be used as a threat by the right-wing parties to
keep Public Affairs on board, but seems unrealistic.
2011 BUDGET
The first task for the next cabinet is the 2010 and 2011
budget. This year's target of 5.3 percent of gross domestic
product will require further spending cuts.
The 2011 deficit target set by the outgoing cabinet is 4.8
percent. The Civic Democrats have said they want to aim for
4.0-4.5 percent deficit.
Outgoing finance minister Eduard Janota has said 60 billion
crowns ($2.87 billion) in tax hikes and spending cuts would be
needed to reach the 4.8 percent target. Reaching 4.0 percent
would require another 30 billion crowns.
What to watch:
-- A Civic Democrat pledge not to raise taxes may make
hitting the target difficult. It may also cause a clash with
Public Affairs, who want slightly higher taxes for firms and top
earners.
-- It will be very tough to find 90 billion crowns of
savings by the time the 2011 budget is submitted to the lower
house at the end of September -- especially if coalition talks
drag on.
-- Big budget savings could hurt recovery. Growth is now
forecast at 1.5 percent this year, and seen at around 2.0-2.5
percent next year by most analysts. The forecasts were made
before the Civic Democrats proposed further budget savings.
-- Longer-term, all the parties have pledged to improve
government procurement, and reform the pension and health
systems. But there are differences about how to do all that, and
there may be clashes between the parties.
-- In healthcare, the parties may clash over payments for
drug prescriptions, which Public Affairs would like to cancel.
All the parties say the role of supplementary private health
insurance must be expanded to pay for above-standard care.
-- In pensions, the main reforms on the agenda include an
introduction of compulsory personal pension savings accounts.
These would divert money from the current pay-as-you-go system,
in which pension contributions paid by working-age people go to
current pensioners. There are different options for how to do
this, and there would also be a temporary funding gap.
ENERGY POLICY
The left wing had promised to cover the short-term pension
gap by increasing dividends from the power firm CEZ <>,
Central Europe's largest traded company, which is 69.8 percent
owned by the state. The right wing says it has no such plan.
The election outcome means there will be no obstacles, as
was the case with the Green Party in the past years, in going
ahead with a tender to enlarge the Temelin nuclear power
station, owned by CEZ.
The deal is worth up to 500 billion crowns ($23.7 billion),
when the two Temelin units are added to plans to build three
other blocks in the Czech Republic and Slovakia.
What to watch:
-- The government could opt to sell some of its stake in
CEZ. The Civic Democrats have not ruled this out, but have not
presented any concrete plan.
(Editing by Kevin Liffey)
