ČNB: Czechia losing its attractiveness for foreign investors

The Czech Republic is becoming a less attractive destination for foreign investors, with many instead preferring Poland or other nearby countries, according to a report by the Czech National Bank (ČNB). At the same time, Czech companies and citizens prefer to invest their excess money abroad rather than in local securities.

“The Czech Republic’s low attractiveness for new direct investment is an increasingly evident problem,” the ČNB states in its recently published balance of payments report for 2021.

The central bank blamed a combination of negative factors for reducing the Czech Republic’s chances of obtaining foreign investment. These include labor availability, the wage levels in comparison with other Visegrád Four countries, the domestic market size when compared with Germany and Poland, and the public investment incentives in comparison with the other V4 countries.

Veronika Hedija, an economist at the College of Polytechnics (VŠPJ) in Jihlava, told CNN Prima News that the report is not surprising.

"Investors compare returns and costs when deciding where to allocate their capital. And if they see that the Czech labor market is literally saturated, it doesn't make much sense for them to locate new plants here when they would have a hard time finding labor or would have to pay significantly higher wages," she said.

This makes it logical for investors to prefer countries like Poland or Hungary. The Czech Republic’s reluctance to adopt the euro also causes some reluctance on the part of investors, as changes in the value of the crown could affect the bottom line.

"Slovakia has the advantage of being part of the eurozone, so there is no exchange rate risk for investors from Western Europe," Hedija said.

The ČNB report also pointed out that a lot of capital was flowing out of the Czech Republic. Investments by Czech-based companies abroad increased almost fourfold compared to 2020, with over half of the investments in the form of loans provided to subsidiaries abroad.

“The volume of reinvestment abroad also markedly rose year on year, but this trend can be explained as a return to normal values after the previous temporary slump during the first year of the pandemic,” the ČNB said.

Another area of concern for the ČNB was that Czech households and companies posted record increases in their holdings of foreign securities, in particular shares. The central bank said this was caused by “an excess of liquidity in the Czech Republic and the shallowness of the domestic capital market.” In simple terms, Czech investors have too much money on their hands and not enough local investment options that offered a sufficient return. This caused the investors to look elsewhere, outside the country.

Foreign investors, on the other hand, did not significantly increase their holdings of Czech securities.

“The domestic equity market continues to be relatively insignificant, with a very small group of companies suitable for investing in,” the ČNB stated.