Photographer: MICHAL CIZEK/AFP via Getty Images

Corporate Champions Find Relief as Crisis Shakes Czech Politics

  • Czech premier clashes with billionaire finance minister
  • Government crisis may derail bills tightening regulations

The Czech Republic is once again in political turmoil, and that may just be all right -- as far as the country’s largest companies are concerned.

The government, the sixth in the past decade, has been rocked by a fight between Premier Bohuslav Sobotka and billionaire Finance Minister Andrej Babis. The spat is paralyzing the legislative process and may thwart a regulatory crackdown on the most profitable companies like phone operator O2 Czech Republic AS and Komercni Banka AS. Bills designed to make mobile-phone services cheaper and curb risk-taking by banks may not be approved before October general elections, according to the Patria Finance AS brokerage in Prague.

Sobotka’s Social Democrats are trying to stem a drop in popularity and reduce Babis’s wide lead in opinion polls. The premier, who plans to tax banks and rich people more if he wins again in the ballot, outlined in March the fast-track adoption of a law boosting competition in telecommunications and allowing the regulator to impose higher fines on operators. That’s now less likely to pass in the fragmented parliament, which is also delaying the approval of a central bank proposal to impose stricter rules for mortgages.

“The political instability is, paradoxically, a welcome development for those investors who were concerned there could be too much regulatory tightening too soon,” Patria analyst Ondrej Konak said by phone. “If these new rules are adopted only after the elections, they may be more business-friendly as lawmakers will be less prone to try enchant voters.”

Read more about the political crisis in a QuickTake Q&A

Czech financial markets have been traditionally resilient to political turmoil as elections produce multi-party coalitions often with opposing economic platforms, which prevents radical policy changes and other interference with industries. The country’s PX equity index has increased more than 10 percent this year, slightly outperforming the Stoxx 600 Europe Index, even as Sobotka stepped up verbal attacks against foreign-owned banks and as his conflict with Babis escalated.

The premier proposed last week to dismiss the finance minister, alleging he may have evaded taxes and accusing him of manipulating news coverage by media belonging to his business empire. Babis, the second-richest Czech, whose main assets are in the chemical and food industries, has repeatedly denied any wrongdoing and refused to step down. President Milos Zeman said on Thursday he would ask the constitutional court whether he’s obliged to dismiss the finance minister.

The government clash may also ease political pressure on power producer CEZ AS, the country’s largest traded company in which the state owns almost 70 percent. Babis has been criticizing the utility’s plan to sell the coal-fired Pocerady power plant and has pressed for a higher dividend than the 33 koruna per share proposed by management in March.

“Some investors have been speculating the minister could use the shareholder meeting next month to simply force CEZ to pay more,” said Richard Miratsky, an equity analyst at Komercni Banka. “But now it looks like Babis may be either gone or too busy fighting Sobotka to actually worry about the payout.”

The nation of 10.5 million has been seen as an investment haven within ex-communist Europe after the governments in Hungary and Poland sought to increase the state’s control over the economy. A European Union member since 2004, the Czech Republic has benefited from close business ties with Germany and now boasts the 28-nation bloc’s lowest jobless rate and some of the best-capitalized banks.

“We regard political risk for individual Czech industries and the equity market as low,” said Radim Kramule, a money manager who helps oversee $9.2 billion at the country’s second-largest investment company, a unit of Erste Asset Management GmbH. “I can’t remember any legislation in the past years that would significantly affect the Czech stock market.”

— With assistance by Peter Laca

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