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Czech Republic/Romania: Transition Economies Losing Momentum

Prague, 24 November 1997 (RFE/RL) -- The Czech Republic and Romania are two European transition economies at opposite ends of the spectrum. The Czechs made quick and initially very successful efforts to shed the constraints of central planning. The Romanians became enmeshed in years of neo-communist rule and only recently have made significant steps on the on the road to change.

Despite their differences however, the two countries share something significant in common -- they both now face a loss of forward momentum.

For the Czech Republic, the problem is political as much as economic. The coalition government of Prime Minister Vaclav Klaus has been sapped of much of its vigor, and analysts see its continuing weakness as a major factor in retarding a return to economic health.

The next few months have a series of potential danger points for the government, which has no firm majority in parliament. In December the coalition faces the second and third reading of the crucial 1998 austerity budget in parliament. Following that, in early January, the coalition partners will hold a joint conference at which the current fissures between them could develop into an open split. Later, the country's presidential election could exercise a destabilising influence on the government, and in February, the government faces a vote of no-confidence expected to be called by the opposition Social Democrats.

However, Premier Klaus appears determined to persist. The government is making progress, albeit slowly, in some key areas, for instance bank privatisation and regulation of capital markets. On November 19 the Cabinet finally gave the go-ahead for the hiring of consultants to advise on the sale of the state's stake in three of the country's major banks. Also this month, after long delay, parliament approved legislation creating a Securities Commission to police the seriously under-regulated Czech capital markets. But analysts question whether this will help much to attract foreign investors back in the short term, in view of the overall political uncertainties, plus double-digit inflation, plus slow growth combined with persisting high foreign debt levels.

Prague-based Analyst Jiri Krovak, of Woods investment advisers, notes on the positive side that figures show a continuing trend to a narrowing of the trade deficit. Once seasonal factors are taken into account, the trade deficit for October was almost a 1 billion crowns lower than in the same month last year, thanks to good export performance by restructured companies grouped around the automotive industry.

In Romania, the recently-begun reform process is marked by plummeting living standards and apparent growing hesitation on the part of the goverment of Prime Minister Victor Ciorbea. Ciorbea has just announced a government re-shuffle, to take place in the next few weeks, and this has the potential to produce disunity at a time when popular protests against the severity of the reform process are growing. Last week Bucharest saw the biggest protest demonstration since the present government came to power a year ago. Despite that, opinion polls have shown continued wide support for the painful adjustments necessary under reform.

A senior analyst with Chase Manhattan Bank, Robin Hubbard, says the problem does not lie so much in the lack of will on the part of government leaders like Ciorbea. He says that will at the top remains strong. But he says a mixture of bureaucraric inertia, plus resistance to the closure of loss-making enterprises is slowing the government's momentum.

He notes there is continued strong support from multilateral organisations like the International Monetary Fund, but he says that the Romanians must continue their own efforts to make progress. Last month both the IMF and the European Union urged Bucharest to speed up the reform process, while at the same time they praised gains made so far.

Hubbard said in the current situation, short-term investment prospects in Romania are not good, but are reasonable in the longer term, since good companies can be bought for rock-bottom prices.