Czechia Watch: Wind of change after the elections

The national elections ended with a narrow win of the centre-right coalition SPOLU with 27.79% of votes, followed by Babis´s ANO with 27.12%, and the coalition of Pirati and STAN, a liberal progressive center-right coalition, with 15.62%. CSSD, the ruling coalition party, did not pass the 5% threshold to make it into the Parliament and — for the first time since the fall of the Iron Curtain — neither did the Communist Party.

In terms of the number of parliamentary mandates, ANO won by an extremely tight margin: 72 followed by the coalition SPOLU with 71 mandates, the coalition of Pirati and STAN with 37 mandates, and the last, nationalist party SPD with 20 mandates.

Now, it is the president’s Milos Zeman call to give the mandate to form a government. As Zeman stated before the election, Babis, the incumbent prime minister, is his first choice. However, his chances to put together a majority are slim. Both coalitions already expressed themselves against forming a government with ANO, and with its current coalition partners, Social democrats and the Communist party out of the Parliament, ANO now has to rely on SPD. But even if they partnered up, they still would not reach the required majority. Nevertheless, if Babis fails to form a government, which is likely, he will probably get a second chance to do so. If he fails again, the nomination of the new Prime Minister then goes to the Speaker of the new formed Parliament.

With the election results known, the negotiations and coalition talks are likely to be lengthy, also considering the president’s health conditions. Nevertheless, in any case, the Constitution offers a solution. The new Parliament must assemble within 30 days after the elections and vote for the Speaker of the Parliament, who takes on the mandate of the President to nominate the new Prime Minister.

Since there is no strict deadline to form a new government, the coalition negotiations might even stretch over several months. In our view, the financial markets will tolerate this as they are used to it in other countries, e.g. in Germany.

From the perspective of economic policy, the positive news is a return to fiscal responsibility and the respect for the rule of law and basic institutional principles including the central bank’s independence. This should be reassuring and highly welcomed by international investors. It signals an orientation of the Czech Republic towards the West and gives hope for constructive cooperation with the EU.

The first task of the new government will be to revise the budget plan for 2022, even if this required accepting a provisional budget for one or two months. Given the current loosely defined expenditure, this would not stall the budget operations next year.

Financial markets were unimpressed by the outcome of the election. The Czech Koruna opened the new week in the exact same spot it closed the previous one. The 10-year government bond yield did not react either. This might reflect the fact that post-election negotiations may take months to conclude, and the to-be new government has yet to reveal its program. Assuming the transfer of power happens smoothly and in a reasonable time, however, we think the change will be CZK-positive, and may also lead to a minor reduction in bond yields.