Only a few years ago, fund managers saw in the Czech Republic one of the more stable and progressive of the central and eastern European markets. Recent-ly, however, macroeconomic problems and a reluctance on the part of the government to change regulatory practices have seen its popularity slide.

Last year's currency crisis and the bad debt burden of the three leading banks have done little for the confidence of foreign investors. Nor has the government's reluctance to force through economic reforms. With elections to be held on June 20, and the polls suggesting no clear winner, the prospect of a coalition or minority government looms.

Michal Rizek at CAIB London believes that nothing short of further privatisation, beginning with the banks, will help the economy and markets, and provide more opportunities for foreign investors. These investors look at the Czech market and realise that investment op-portunities are missing. Companies have not restructured as is clearly necessary, especially where local investment funds, which grew out of the original privatisation process, are involved. This is due to the shareholder structure of the Czech companies. Of the top 50 companies, 44% of the stock is still held by the government, 20% by local funds, 19% by strategic stakeholders but only 8% by foreign investment funds."

One solution may be new regulations for the local funds themselves, and Rizek sees opportunities where the funds take up mutual status, and divest themselves of part of their holdings. Nevertheless his general feeling is that Prague is a stock-pickers' market and will remain so for some time.

"It is difficult to speak of sectors because of the big differences between competing companies, but in general I am positive about the sector of investment funds," he adds.

Dalibor Vovruska at ING Barings agrees that in the past one problem has been that the market has not necessarily reflected the economy as a whole. "Despite privatisation the government still holds far too much stock in listed companies. Other companies are also still in receipt of state aid or are cosseted by the government. Investors wish to see radical restructuring of these companies."

Again, however, the problem of the local investment funds' holdings comes into the equation. "Currently the influence of the local funds is disproportionate. Fund managers are paid their fees on an asset rather than performance-related basis. This means they have little interest in the process of restructuring. The new law which has been passed by parliament but which awaits the the assent of the senate, should make a difference as funds reduce their holdings."

Vovruska also believes that moves by some funds to change their status may open up opportunities for foreign investors.

Meanwhile the underlying regulatory problem has been addressed by the formation of a securities and exchange commission in April. This has been given a substantial 12- month brief which most analysts believe it will be unable to meet in full.

Credit Suisse First Boston emerging Europe equity strategist David Aserkoff believes foreign investors are unimpressed with reforms so far. "The problems revolve around the whole regulatory structure and investment industry, especially the banks. One problem for the latter is that at the same time that more news leaks out concerning bad debt the value of the banks decreases, and yet everyone is clamouring for the banks to be fully privatised, when clearly it may not be the ideal time."

Aserkoff also agrees that corporate managers have not responded well to the worries of minority shareholders, and allowed local funds to take advantage, further damaging foreign investors' confidence. "Measures are being taken such as the restructuring of local investment funds and the creation of an SEC, but foreign investors remain skeptical about the former, and believe the latter to be underfunded and not fully independent of the government considering the programme it has been set."

Needless to say the uncertainties outlined by equity analysts are a matter of concern for those interested in fixed interest investments. Petra Krenn at Bank Austria in Vienna believes the current bullish mood will change after the election, and recommends investors take a short-term view. "The whole market needs restructuring and privatisation needs to be speeded up," she says, adding that a devaluation of the currency and increased inflation are expected later this year. Kevin Hall"

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