10. Czech Republic
In 2021, there were roughly 1.23 million active enterprises in the Czech Republic. 99.86% of these firms were SMEs with less than 250 employees each. Micro-firms dominated the business landscape, comprising 96 % of all SMEs in 2022. The total number of SME employees decreased by 36 thousand in 2020 compared to 2019 and remained constant in 2021. Given the situation caused by the coronavirus epidemic, this decrease can be considered moderate.
In 2022, SME investment can be still assessed as favorable for established companies due to high bank liquidity. Banking and non-banking institutions, private individuals, venture capital funds offer a wide portfolio of financial products. However, between 2021 and 2022, there was a sharp decline in new business loans. Interest rates for SMEs increased by 113 % in 2022 compared to 2021 in reaction to high inflation and unstable geopolitical and economic situation.
SMEs are very vulnerable, especially in terms of financing, and have a higher perception of financial risk due to more frequent rejections of loan applications. Although, the situation in this area was improving until 2021, it reversed in 2022 in reaction to the geopolitical and economic turmoil. The 2022 SAFE Survey by ECB states that the share of SMEs in the Czech Republic, which mention the access to finance as being no obstacle, decreased from 47% in 2021 to 37% in 2022. In terms of access to common methods of financing, the Czech Republic is above average in several indicators showing the quality of SMEs' access to finance. The most important direct sources of external financing for SMEs are credit lines or overdrafts (49%), bank loans (40%) and leasing (48%). So far, capital financing is relevant for only 2% of companies. In terms of the use of financing, between 2020 and 2022, investment in the development of new products or services has slightly decreased (from 25 % to 22 %). Most sources of finance are intended to finance either fixed investments or inventories and working capital. Share of the companies that have stated, that costs for materials and energy have increased, rose dramatically from 2020 to 2022 (from 30 % to 88 %).
Alternative sources of financing include venture capital, angel investments, bond issuance, crowdfunding and state support. However, the Czech Republic is characterised by a weaker investment environment, which undermines the establishment of new companies and the financing of new SME projects. While crowdfunding has become a popular tool for obtaining the necessary financial resources, capital financing was underdeveloped compared to similarly sized EU economies for a long time. There was a lack of willingness to invest in the early stages of business development (pre-seed, seed, start-up and later stage venture). Investments in these entities are high risk for investors and banks, mainly due to the absence of relevant corporate history, lack of collateral or lack of information to assess their credit risk or valuation of their intangible assets. The situation has changed drastically after three venture capital funds with public investments were established, and the venture capital supply in the Czech market is comparable to that of the other similarly sized EU economies. Venture capital and growth capital investments were peaking in 2021, reaching EUR 751 million. In 2022, there was a drop of 63%, caused partly probably by incomplete data. The market for angel investments is barely visible and fragmented. However, the situation for innovators in the idea or start-up phase is still complicated. Consequently, the Czech government plans to establish another 3 pre-seed and spin-off co-investment funds in 2023.
The SMEs Support Strategy in the Czech Republic for the period 2021-2027 (SME 2021+) aims to increase the productivity and competitiveness of SMEs, and, at the same time, to strengthen their international position, inter alia in the field of research and innovation or the use of advanced technologies and skills. The Strategy represents the key strategic document for the preparation of the European Union (EU) cohesion policies over the 2021–27 programming period in the area of enterprise development. This includes the Operational Programme Technologies and Applications for Competitiveness (OP TAC), with a total allocation of CZK 81.5 billion. In 2021, the National Recovery Plan (NRP) has been established drawing its sources from the Recovery and Resilience Facility and offering CZK 191 billion to finance post-pandemic recovery. Government support for SMEs and entrepreneurs primarily consists of measures in the areas of investment and operational financing, export support, support of the energy sector, development of entrepreneurial skills and financial literacy of entrepreneurs, technical education and research, and development and innovation.
There are several financing tools, such as government loan guarantees (National Development Bank – former Czech-Moravian Guarantee and Development Bank), financing and insuring schemes for exporting SMEs (Czech Export Bank and Export Guarantee and Insurance Corporation) and government loans (EXPANZE). Most common are, however, direct grants. These are awarded from calls launched by OP TAC and NRP.
The Czech entrepreneurs face unprecedented challenges as a result of growing economic insecurity, economic downturn brought by the COVID-19 pandemic and the subsequent post-COVID developments, including supply chain disruptions, high inflation, global energy market disruption, rising interest rates, lack of skilled labour, longer-term green and digital transitions as a response of climate changes, and its effects on business competitiveness. There has never been such an extensive set of threats to entrepreneurship since the beginning of the independent Czech Republic in 1989.
Indeed, these disruptions are affecting Czech entrepreneurs, as evidenced by survey data. For example, according to the survey held in October 2022 by the Association of Small and Medium Enterprises and Tradesmen Crafts of the Czech Republic (the AMSP), 92% of SMEs are struggling with high inflation, 86% with the energy crisis, 70% are affected by the impact of the war in Ukraine, 63% are struggling with a lack of raw materials/inputs, 59% are affected by the digital transition, 57% continue to be affected by the COVID-19 pandemic. In addition, 57% of respondents perceive worsened access to finance and 56% are struggling with the logistics problems and transport limitations.
An economic survey published by the CZSO (Czech Statistical Office) shows that business confidence declined in all sectors except construction at the end of 2022. Industry has the largest weight in the business confidence indicator, where confidence in the economy has been falling continuously since June 2022. This is not only due to falling demand, also manifested in reduced expected production, but also in the persistent growth in the number of businesses considering staff reductions in recent months. Compared to November 2021, business confidence is lower in industry, as well as in the other segments surveyed, excluding construction.
These developments are also visible on the macroeconomic level. Gross domestic product grew by 2.4 % year-on-year in 2022 thanks to a strong first half of the year. In the second half of the year, it fell into a mild recession. The performance of the Czech economy has been burdened also by the Russian aggression against Ukraine which has caused aggravated disruptions in supply and procurement chains, leading to global shortages of some key inputs and rapid price increases, especially in energy prices. Rising inflation has contributed to the deterioration of the financial situation of businesses and households, being amongst the highest in the whole EU. The contribution of foreign trade to annual GDP growth was again positive and the trade balance again resulted in surplus. The average inflation rate for the full year 2022 was 15.1% (up from 3.8 % in 2021).
Unemployment rate was 2.4% in 2022. The domestic labour market continued to show imbalances, although the number of job vacancies far exceeds the number of unemployed, the excess demand has been decreasing since about the middle of the year, falling by around 52 000 year-on-year. Business demand for labour remained high. In the Czech Republic there is a shortage of workers in technical occupations, services, but also low-skilled workers. Labour market imbalances remain one of the main factors hampering the growth of the domestic economy and creating pressures on the participation of foreign workers. Average gross monthly nominal wages had risen by 6.5% year-on-year, but huge inflation had reduced the value of real wages by 7.5%.
SMEs play an important role in creating jobs in the Czech Republic and generally contribute to social stability and economic development. Their development may, however, be hindered by factors such as insufficient collateral for obtaining capital or loans, limited resources to access information (especially on new technologies and potential markets), limited market reach, obstacles to entering foreign markets, as well as insufficient innovative potential.
The value added by SMEs continues to grow on a year-on-year basis, rising over CZK 2 trillion in 2021. The share of SMEs that directly export is lower than that of large companies, amounting to one-third (30%) of all exports. The statistics may, however, be skewed by the fact that SMEs often play the role of suppliers to large exporting enterprises, and they play a bigger role in indirect exports.
Investments of SMEs in 2021 reached CZK 664.6 billion and grew by 26% in comparison with 2020. The share of SMEs in investments of the business sector in 2021 reached 56%, which represents a stable value for several years.
New SME loans declined continuously between 2007 and 2010 by 40.7%, recovering slightly in 2011 and 2012 (+0.6% and +4.6%, respectively). In 2013, this upward trend again reversed with new SME lending dipping by 33.3% in the span of a single year. Recovery since then has been uneven, with increases in 2014 and 2015 and a 15% drop in 2016. The volume of new SME loans remained stable in 2017. In 2020, the trend changed, and the volume of new SME loans increased (29.9%). Since then, the new SME loans continued dipping dramatically and in 2022, they reached a new record low, falling by 66% in comparison with 2008.
Total new business loans peaked in 2008 before contracting again by a total of 30.8% in the 2008-11 period. In 2019, new business lending declined by 45% vis-à-vis the pre-crisis period (2008). In 2021, new business loans reached its highest values since 2010, but dropping again a year later by 34 %.
There are two main factors explaining this evolution. First, given the unprecedented economic and political challenges (geopolitical tension, supply chains disruptions, global energy market disruption or spikes in energy costs and input prices) companies substantially lowered their investment activity and used their own sources of finance or even borrowed money for their operational expenses. Second, in reaction to high inflation rates the CNB substantially raised interest rates which had an immediate negative impact on costs of business lending for companies.
As in the reference period, the share of new SME loans to total new business loans remained stable around 20 % until 2020. In 2021, it dropped to 12.2 % increasing slightly to 14.9 % in 2022. This trend is caused by two factors. First, banks also due to growing interest rates implemented stricter rules for credit risk management, placed higher demands on the financial health of borrowers and requested higher loan collateral. Entrepreneurs, on the other hand, faced disruptive events (post-pandemic disruption of supply chains, Russian aggression to Ukraine, peaking energy and gas prices) and subsequent fears of an uncertain economic development led to discretion in lending money along with more efficient methods of utilising own resources.
SME interest rates were down for the third year in a row (2015-2017), in the next two years (2018-19) rates began to increase and in 2020, the rates reached 3.3%. This represents a cut of less than half from their 2008 level (5.6%). In 2022, the SME interest rates have seen a dramatic increase by 113 percentage points reaching 6.9%. Large enterprises’ interest rates also followed a similar pattern of decline since 2008, reaching 1.8% in 2016, and 1.9% in 2017. Since 2018, they started to grow slightly only to fall to around 2% in 2020-2021. Similarly, to the SME interest rates’ increase in 2022, the interest rates for large enterprises recorded a new record high, when they grew to reach 7.7% compared to 2021. For the first time in the history of the Scoreboard, the interest rates for SMEs were 10 % lower compared to the rates of large enterprises. This is in part explained by stringent lending rules of banks to all size classes and the high costs of lending when it comes to larger amounts of money in times of high inflation.
The Czech National Bank kept interest rates stable in the second half of 2022 at 7%. Although new lending rates for non-financial corporations fell once in July 2022, they then picked up from the rise in previous months and in October surpassed the 9% mark for the first time in history. Year-on-year, the rate rose by more than 6%. This suggests that businesses are facing significantly higher borrowing costs than in the past, and this unfavourable situation is likely to persist in the coming months. Rising interest rates, together with rising input costs, will act to curb investment activity, contributing to a cooling of economic growth.
Venture capital (VC) investments peaked in 2008 and then increased dramatically in the last years, reaching more than a double amount of EUR 111 million in 2021, the value of which remained stable also in 2022. Growth capital fell steeply from EUR 192 million in 2009 to EUR 25 million in 2020. In 2021, there was a new record high when the growth capital grew by more than 2 500 % compared to previous year to reach EUR 639 million. In 2022, it fell rapidly to EUR 166 million. Developments in total equity investments were rather sluggish in 2011-2018. The trend reversed in 2019 when equity investments reached a level eight times higher than the previous year, but in 2020, they fell again by 74.8% to reach EUR 39.2 million. In 2021, the equity investments have seen their revival, reaching a new record high, peaking at EUR 751 million. The reference year saw some cooling in private equity investments, dropping by 63%.
Several public initiatives of the Ministry of Industry and Trade (MIT), mainly through the EIF, helped develop the market recently. A new VC/PE fund – ESPIRA – was founded thanks to CEFoF, which also supported ENERN III and Genesis Growth Equity Fund in the later stage/growth segment in 2018. Two further accelerator/seed funds (Nation 1 VC and Lighthouse Ventures) were established as a result of the EIF fund of funds under the programme VENTURE CAPITAL OPEIC at the end of 2018.
Another option for alternative SME financing emerged in the Prague Stock Exchange, where a new alternative SME market START was created in 2018. The MIT has in cooperation with the National Development Bank (NDB) established a new instrument VENTURE CAPITAL – IPO FUND which helps the SMEs enter the START market since 2020. Insofar, there has been 3 IPOs supported from the fund in a total volume of CZK 61.8 million. As of 2022, 13 IPOs were issued on the START market. Equity crowdfunding platforms like Fundlift are also gaining importance.
Similarly, the BROWNFIELD FUND has been established in 2020 in Moravian-Silesian region, which works also as a fund of funds. It is a financial instrument aimed at the regeneration of brownfields in the Ostrava agglomeration and is managed by the NDB and operated by Urban Development Fund MS s.r.o as a result of a public tender. Three projects have been financed so far for a total amount of CZK 83.8 million.
Development of the factoring business has fluctuated in 2007-2016 around CZK 130 billion. Since 2017, however, it began a journey of a stable growth reaching CZK 286 billion in 2022 and more than doubling its volumes since 2007. Similarly, the leasing business has been growing steadily since 2007 with a minor setback in 2020 in a reaction to COVID-pandemic but recovering immediately after. The volumes of the leasing business have more than tripled in 2007-2022 rising from CZK 18.7 billion to CZK 69.2 billion.
The proportion of non-performing loans to all loans almost tripled between 2008 and 2010, growing from 4.1% to 9%. This could be attributed to a worsening of the Czech economic climate in the same period. Since then, this percentage has fallen steadily, to 3.1% in 2019Due to the COVID pandemic, the indicator increased again to 4.1% in 2020 but fell down to 3.3% in 2022.
SME bankruptcies increased year-on-year between 2008 and 2015 by 1100 %. Since then, it has declined continuously, falling from 9 077 SME bankruptcies in 2015 to 7 052 in 2021, respectively to 5 835 in 2022. The number of bankruptcies of commercial companies has seen its peak in 2013 with 1 398, since then they were steadily decreasing until 2020 (610). In 2021, the number of declared bankruptcies increased again by 20% year-on-year (741 bankruptcies) but dropped in 2022 again to 700 bankruptcies.
52% of the total value of B2B invoices issued by businesses in the Czech Republic was overdue in 2022. Although this is above the regional average (43%), it represents a significant rise in the percentage of overdue invoices reported before the pandemic (24% in 2019). The increase in late payments is caused by liquidity shortfalls experienced by B2B customers.
Government policy support to SMEs is based on Act No. 47/2002 Coll., covering the support to small and medium-sized enterprises, and on the Strategy to Support Small and Medium-Sized Enterprises in the Czech Republic 2021–2027. Financing SMEs has been one of the key topics of the Czech government in recent years due to the geopolitical developments and steep increases in energy and input prices. The government was looking for ways to facilitate access to finance for SMEs.
The MIT has prepared several actions to support SMEs to face the energy crisis. First, the Operational Programme for Technology and Application for Competitiveness (OP TAC) was launched in August 2022, offering SMEs and also large businesses up to CZK 10 billion for energy savings in companies. The projects were eligible for a subsidy of up to CZK 200 million and depending on the type of enterprise and regional support map, the aid rate ranged from 35% to 65%.
In March 2022, a call from the National Recovery Plan (NRP) funded by the NextGenerationEU for purchase and installation of photovoltaic systems with/without storage was launched. In view of the great interest of business entities in this activity, the former allocation has been increased several times from CZK 3 billion to CZK 7 billion, also with the help of the REPowerEU.
The National Development Bank (NDB), as a successor to the Czech-Moravian Guarantee and Development Bank (CMGDB) stepped up its guarantee activities in the aftermath of the crisis and subsequent decline in SME lending. Self-employed persons and SMEs most affected by the high energy prices can benefit from the "Guarantee 2015-2023" programme, for which the guarantee period is 2 years, without fees and the cost of providing the guarantee. The guarantee is provided up to 80% of the guaranteed loan granted to the entrepreneur up to CZK 2 million.
Under the "EXPANSION-GUARANTEE" programme financed by the Operational Program Enterprise and Innovation for Competitiveness (OP EIC), the predecessor of the OP TAC, self-employed persons and SMEs whose energy costs are more than 10% of their total operating costs can apply for a guarantee for an operating commercial loan provided by a private bank. The guarantee is provided free of charge up to 80% of the guaranteed loan granted to the entrepreneur in the amount of CZK 1 to 10 million, and the guarantee period will be up to two years. The beneficiary of the aid may be granted a financial contribution towards the interest on the guaranteed loan. The total amount of the financial contribution paid may not exceed 4.5 % per annum of the amount of the guaranteed loan used for eligible project expenditure, up to a maximum of CZK 800 000.
ENERGY SAVINGS
This programme is designed for companies that are considering energy-saving projects. Beside subsidies, it provides also discounted loans to help businesses of all sizes to finance projects that are specifically aimed at saving energy. Projects can be implemented anywhere in the Czech Republic except the capital city of Prague.
The first call for proposals has been launched in 2017 under OP EIC, and with the allocation of CZK 400 million OP EIC will run until 2023. Among supported activities are the following: reducing the energy consumption of business buildings; modernisation of electricity, gas and heat distribution systems in buildings; upgrading or replacing existing equipment (e.g. boilers) for self-consumption energy production; installation of cogeneration units; acquisition and installation of renewable energy sources for own use (biomass, solar systems, heat pumps and photovoltaic systems); upgrading or replacing outdated lighting in buildings and industrial sites with modern and efficient systems; introduction of energy metering and control systems; recovery of waste heat from production processes; replacing energy-intensive production machinery (including mobile machinery such as construction machinery and equipment); and replacing equipment with more efficient technology and electricity storage.
The interest-free loan is provided up to CZK 60 million with up to 90% of the eligible project expenditure (for projects up to CZK 3 million). In other cases, up to 70% and co-financing with a commercial loan of at least 20% of the eligible project expenditure is required. The maturity period is up to 10 years, with deferment of repayments for up to 4 years. SMEs may also receive financial contribution for the energy assessment of up to CZK 250 000 and a financial contribution of up to CZK 4 million for interest payments of a commercial loan. The allocation of this programme has been increased from CZK 140 million to CZK 390 million due to increased demand of entrepreneurs.
Source: See Table 10.1
References
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