FACTBOX-Key political risks to watch in the Czech Republic

PRAGUE Aug 2 (Reuters) - Czech Prime Minister Petr Necas's three-party, centre-right coalition is set to win a confidence vote in parliament on Aug. 10 and runs the country with the strongest majority of any government since 1993.

The three parties -- the right-of-centre Civic Democrats, the conservative TOP09 and centrist Public Affairs -- have 118 of 200 seats in the lower house after winning a May election, promising to revamp the budget and deal with corruption.

The coalition made it through its first squabble last week when it agreed spending cuts at ministries that the junior member Public Affairs said harmed its portfolios the most.

Following are some key risks the expected government faces.

COALITION TIES BEFORE AUTUMN POLLS

The harmony of the coalition could be tested in the run-up to October municipal and Senate elections where the parties are competing and which are an early test of popularity. Municipal polls allow parties to give members thousands of local jobs.

The new TOP09 party, created last year by political veterans, won a surprisingly strong 16.7 percent of the vote in May at the expense of coalition leader Civic Democrats.

The Civic Democrats, with 53 seats in parliament, will be trying to keep TOP09 Vice-Chairman and Finance Minister Miroslav Kalousek from stealing the spotlight and splitting the coalition while putting together the 2011 budget.

Kalousek's plans for freezing spending in ministries' budgets to help meet the 2010 budget target -- approved by the cabinet last week -- angered Public Affairs, whose ministries will account for half the savings. [ID:nLDE66R27V]

Public Affairs, in parliament for the first time, is seen as a wild card. Chairman Radek John once said the party was neither left- nor right-leaning, but whatever best suits the country.

What to watch:

-- Details of the 2010 ministry cuts may come up for debate among the coalition parties before the October elections.

-- The 2011 budget must be submitted to parliament by the end of September, and preparations could be hurt or delayed by pre-election posturing by parties over who bears most savings.

-- Will the Civic Democrats be upstaged by TOP09 and its role at the finance ministry? This office will take the lead on cutting the budget and managing state assets. Necas has said he would orchestrate tax, pension and health reforms.

FISCAL POLICIES/OUTLOOK

The parties have agreed on 54 billion crowns ($2.85 billion) in budget savings for 2011, and aim for a fiscal gap around 4.6 percent of GDP, down from 5.3 percent planned for 2010.

They also want to raise 20 billion crowns by scrapping planned tax cuts and have avoided using new or higher taxes.

Analysts and the outgoing finance minister have warned savings should come from a mix of spending cuts and tax rises.

Czech public debt is half the European Union average at 35.4 percent of GDP -- up from 29 percent in 2007 and rising fast, due largely to rising debt costs and structural problems exposed by the economy's 4 percent contraction in 2009.

The finance ministry expects the export-reliant economy to rebound by around 1.6 percent in 2010 and 2.3 percent in 2011. However, austerity across Europe could dampen demand for Czech-made goods, hitting recovery and government coffers.

The IMF and OECD have warned Prague it must reform its pension, health and welfare systems. Analysts say these reforms can fix long-neglected problems that could pose a medium-term threat to the 'A' credit score from rating agency S&P.

What to watch:

-- The 2011 budget will set the pace of fiscal consolidation and how quickly the country will move back to the EU's debt ratio of 3 percent of GDP, targeted in 2013.

-- The right-leaning parties will resist tax hikes but may have to give ground to avoid drastic spending cuts.

-- Analysts say cuts that are too harsh could slow recovery or cause a double dip, as the economy is still saddled with weak domestic demand.

-- The parties have varying views on pension reform. Any agreement could be watered down.

DISAPPOINTED WORKERS

Czech unions are much weaker than in other central and eastern European countries such as Romania, and the government has faced very few labour protests this decade.

But unions, allied with the opposition Social Democrats, could show more muscle in the face of government plans to cut a number of employee tax breaks and public sector wage spending.

This year, transport workers forced caretaker PM Jan Fischer to back down from a minor tax hike on railway workers' benefits.

What to watch:

-- Unions are waiting for government plans to be put on paper before threatening any action. Protests against austerity in western Europe could influence Czech unions' behaviour.

-- Centre-right parties still have political capital after a strong election win on their version of austerity pledges.

ENERGY POLICY

The next government will see through the country's largest-ever power sector tender, and will also set policy on the country's future energy mix to meet climate goals and to ensure security of supply.

Power firm CEZ (CEZPsp.PR), central Europe's biggest firm, with a market capitalisation of $22.5 billion, is 69.8 percent state-owned and a significant source of government revenue.

CEZ has opened a tender to build two units at its Temelin nuclear power plant near the Austrian border, and possibly three more at another domestic site and in Slovakia.

Areva SA CEPFi.PA, Toshiba's (6502.T) Westinghouse and Russia's Atomstroyexport are competing for the deal that could be worth some $24 billion if all five units are built.

The outgoing cabinet has appointed Vaclav Bartuska as its envoy for the tender. Bartuska has spoken out against furthering the country's energy dependency on Russia.

What to watch:

-- Government involvement in the tender.

-- The government may sell some of the CEZ stake. The Civic Democrats have not ruled this out, but have no concrete plan.

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